Neometals (NMT) – Battery Recycling Project gets Major Boost from giant SMS Group (Transcript)

Neometals Ltd.
  • ASX: NMT
  • Shares Outstanding: 545M
  • Share price A$0.16 (30.06.2020)
  • Market Cap: A$87M

Interview with Chris Reed, CEO of Neometals (ASX: NMT), and Accompanied by Jeremy McManus, General Manager.

READ ARTICLE FOR THIS INTERVIEW HERE

Neometals is a ‘Project Developer.’ A technological innovator with a diverse portfolio of intelligent, economic projects, many of which position it in the incoming EV revolution. This includes a lithium refinery, a low-cost vanadium recovery from slag tailings project and their vast titanium-vanadium project. The most advanced project is a proprietary hydro-metallurgical technology that offers a much cleaner, more efficient means of recycling lithium-ion batteries than conventional pyro-metallurgical and mining methods, helping automotive manufacturers with their goal of NetZero carbon footprint.

The project has an ESG component that has become increasingly useful after Elon Musk’s request for as much clean, green and sustainable nickel to be produced. It is clear, the front-end of supply chains is under more scrutiny than ever before, and Neometals has the solution to fit perfectly into the backend of this green narrative. This will help deliver a solution for full supply chain.

Today, we’re talking about Neometals’ JV with SMS Group, a multi-billion dollar German conglomerate (Matt mistakenly refers to SMS as SGS on 2 occasions- apologies!). It was announced today, and Neometals now has a major partner for its flagship battery recycling project. It’s definitely a major milestone. We dig into the details, looking at the terms of the contract and the size of the opportunity that this could present for Neometals.

The company, as we’ve mentioned repeatedly, has more than enough cash, with $85M in the bank, to get this operation moving forward at an accelerated pace, and the next 12 to 18-months look like an exciting runway for catalyst moments. Expect an FID at the end of this period.

We Discuss:

  1. 2:38 – Company Overview
  2. 4:51 – JV with SMS Group: Diligence Process
  3. 8:53 – Potential Size of Market & How They’ll Capture it
  4. 15:28 – Barrier to Entry: Differentiating Neometals
  5. 17:47 – Elon Musk’s Requirements: Greenest Tech Ever?
  6. 22:15 – Terms of the Deal with SMS Group: Liabilities and Funding
  7. 30:37 – “Dividends? Keep ‘Em!”: Addressing Shareholder Concerns
  8. 32:29 – Building Neometals: A Look at the ESG Movement
  9. 36:04 – Raising Money: Do Funds Care?
  10. 38:25 – Understanding the Potential: Timing for Studies and Numbers
  11. 43:55 – What Happens Next?

CLICK HERE to watch the full interview.

Matthew Gordon: Gentleman, how are you? How are you, Chris? How are you Jeremy?

Chris Reed: Very well. Thank you, Matt.

Jeremy McManus: Good. Thanks, Matt.

Matthew Gordon: Thanks for joining us. I know it late your time, so we’ll get straight into it. We have seen the press release came out this morning. It looks like pretty good news. You have actually managed to get this JV together and created a company called Promobius. Do you want to tell us a little bit about it? Maybe start at the beginning for people new to the story, and then we will pick it up from there and get into the weeds with you in a second.

Chris Reed: Neo Metals is an ASX-listed project developer. Historically, we developed the Mount Marion Lithium project, which is one of the world’s largest sources of Lithium. Immediately in 2005, after we started construction we started looking at where in the supply chain we should be next, and all roads lead to recycling. These batteries are a mix of Lithium that’s been mined in Australia up to China, into Europe. Cobalt that has been mined in the DRC into China, into Europe or into Asia into the US. We have gone to such great lengths to combine all these materials in the battery. Surely at the end of life there is significant value to be had by processing these and recovering the battery materials as opposed to, to keep mining primary sources of ore that have got a massive carbon footprint.

So, over the last 3 or 4-years, we have been developing a process. We have been scaling that up from bench scale work in Australia, through continuous lab scale into a pilot plant that we ran at SGS in Canada in 2019. We finished that early in 2020. We executed a MOU with a very large German engineering group SMS Group last year. They have done extensive due diligence. We finished the pilot plant and today is really the culmination of about 9-months of work to incorporate what will be a 50-50 joint venture to develop initially what will be Europe’s largest battery recycling business.

Matthew Gordon: Can we just talk about some of the moving parts first before we get into the detail around the deal itself? SMS Group. Who are they? You say they are a big German group, but tell us a bit more.

Chris Reed: SMS, they have been around for almost 140-years. Privately owned. More than 14,000 employees in 95 sites around the world. They are one of the largest builders of processing plants in the world, based in Germany, which for us outside of China is the largest Lithium battery production hub and emerging. A natural target; they are, what we would say is a high capability partner in terms of delivering what have been successful R&D outcomes from Neo Metals. They are eminently equipped to build and operate these plants on behalf of the joint venture. They are one of the largest generators of German-backed import-export financings. They have been around a long time more than €38Bn sales last year. And I had a look in the annual report that they have got almost €1Bn cash. So, they are a very, very strong capable group and they bring a lot to the transaction.

Matthew Gordon: It would be nice to talk about one of the other variables, which was the market for this. What I’m trying to do is work out the scale of the opportunity, and then be able to get a sense of the quantum that you’re going to be able to capture. SMS – they are German, is that’s why you’re focused on the European ecosystem? You have got this battery metal thematic going on throughout Neo Metals, but what is it that you have been doing with them over the last 9-months to get them through to this stage? Can you tell us what’s the diligence process? What’s the problem you’re trying to solve?

Chris Reed: So essentially, you have got these batteries at the end of life and they have a lot of base metals in them, they have Lithium in them. It is hard to store them safely and they’ve got very high value in terms of the in-situ metal in those batteries. So, we have had to develop a process that can deactivate those batteries. We shred them, make them safe to downstream process. And then we developed a downstream process to recover the cathode chemicals that can be reinserted back into the supply chain. And, you hear about, Elon Musk has come out and said, we need Nickel and the Nickel producers to produce more Nickel sulphate. Okay, I do need more Nickel sulphate, but the Nickel is going into these batteries, you can capture it at the back end and you don’t need to have big mines that make concentrates and then they get shipped to refineries around the world and then they get made into metal and then they get dissolved into sulfuric acid and make sulphates and then go to cathode manufacturers. We can actually regenerate exactly what needs to go back into the supply chain at a fraction of the carbon footprint of virgin-mined materials. My offer to Elon Musk would be: we will recycle all the Tesla’s batteries forever for free. And if you want to phone me up, hit me up and I’ll even let you share in some of the profits.

Matthew Gordon: That’s a big offer. I hope he’s listening. You never know. So that’s interesting. You’re saying that you have got a green solution for providing Nickel back into the battery cycle. But part of what I wanted to understand is the size of this market. What is the total potential size of this? What is the bit you’re going to capture and how do you do that?

Chris Reed: Our initial deployment, so we own a 20,000t commercial scale shredding plant, or a comminution circuit. So you have got to make it safe to process. Then you have to separate out the plastics, the steel, the Aluminium, and Copper foils, and then you are left with a black powder or what we call a black mass. We then leach that and recover the cathode chemicals. So that’s essentially the process in a nutshell. And that addresses pretty much what the market needs. It needs to process them safely and it needs to close the loop. And if we have a look at, perhaps the timing of the deal and you go back to, what have you done in the last nine months – so what we have done is, is we have shown them the scoping study, the results we have then walked them through and they have been able to witness the pilot plant. We have wound that up. They have seen the recoveries we get, they have seen the purities that we can make. We have got the format test where it reports the mass energy balance and it goes into the engineering studies, and the guys are comfortable. And the opportunity in terms of the size of the market, so they’ve deduced what we have got to process. It is technically feasible. What they’ve told us so far is that it is economically viable. But when you overlay that, what is the opportunity into Europe? The investments in the EV sector in Europe have outweighed what has been invested in China for the last three years. The Chinese were there, they’re bigger, but they were there earlier. Europe has been where the factories have been committed to. And so,  what you have found, even from the start of the year to where we are now, it has gone up to 415 gigawatt hours. It is now over 500 gigawatt hours. And when you translate that into batteries that will hit the market and then how many batteries will come after they used for life, somewhere between 7 to 10-years, you are looking at a multimillion ton potential feed.

And so initially we’re going to roll out a 20,000t plant, and that’s designed really to take the production scrap from a gigafactory, not necessarily Tesla’s, but LG or any other, or indeed dealing with the car maker who gets their batteries from different sources, but initially designed to take production scrap. And then we would scale that up for the end of life applications. It is a big market. And if you multiply a couple of million tons by the in situ value, you are well into the double digit billions in terms of the market, and hence why for us, some might look at the transactions and go, well, you are giving half away, and then I would say, well, are you? You have approved a technology that cost you X to this point, and you have got to make it a reality for your shareholders and turn it into cash. What is the most efficient, timeliest outcome here, which is to get someone who is perfectly capable of delivering on time and scaling up to whatever the market needs? , SMS aren’t in there to build a little dinky 20,000t plant, they are there to build multiple 200,000t or larger plants. That’s the game.

 So, quality product meets all the regulatory requirements, meets the needs of the market. This is a step away and you look for minerals and materials for a sustainable future – that way. And so, we are giving them materials for a sustainable future in a sustainable process. It is a step away from mining, but it is lower risk than mining. We have done is we have partnered with someone who can actually make our 50% worth multiples more than what we could do. Now, we could deploy this in Australia, but Australia wouldn’t be big enough for 5 to 10-years. Europe is big enough. We can say with confidence that the money that is being committed, last month you had the German government commit €135Bnto the health of the EV carmakers. All of a sudden, this €6,000 cash subsidy to go with the €3,000 from the producer – that’s the carrot. And then they’re going to invest €65 billion investing or installing 77,000 high voltage charges in 14,000 service stations in Germany. That’s €135Bn. That is more than my country has committed to COVID relief for the whole country. And this is Germany just for the car makers. And you have got the French who have committed €12,000 for every domestic. And then you have got penalties if your fleet produces more than 95g Co2 p/km. You have got the carrot and the whip, just driving this transition to decarbonise transport and circular economies.

We started out 3 or 4-years ago, we thought this will grow into a good business. And we get into these businesses early. We were first into Lithium, we were first out of Lithium production. We’re one of the first into large scale recycling. But what has surprised us, has been the confluence of all these regulatory and ESG and circular economy and just these massive tail winds and these volumes just, they keep coming at us.

Matthew Gordon: Europe is the right place to be, and you have got the right partner in SMS because they have got the capital and connections. I understand that. You talked at the beginning about – you have developed. I’m trying to understand what are the barriers to entry for people coming in to try and get to capture some of this? And also because I understand the first mover advantage that you have got, but have you got proprietary technology? Have you got intellectual property? What’s to stop other people coming in and talking the same game?

Chris Reed: Yes, sure. We have developed own flow sheet. We have EU and Australian provisional patents pending. We have done the normal freedom to operate searches. I guess anyone that tries to follow us will be getting a nasty letter from our employees, our lawyers. And probably the employees. We have learned a lot over the last couple of years; it is called research & development for a reason. If you knew what you were doing, you wouldn’t call it research & development. So equally as we have found a process, we have found not what to do as well.

So you have got to be careful with these batteries. I remember early on, my chief operating officer gave me a book on Lithium batteries called ‘Canned lightening’. If you don’t shred them the right way, we have all seen from the press what can happen? Safety primarily and then recovery of value with an eco-friendly footprint. That would be pretty much the 3 drivers that that I would espouse that our process has.

Matthew Gordon: So talking about the Elon Musk statement last week about Nickel. He wants a green, efficient production of Nickel. And some of the Nickel companies, especially the Sulphate guys, reacted quite positively to that. You are at the other end of the scale, but nevertheless, as important, it seems. That seems to be the story: you are saying that you’re nevertheless important in terms of the total carbon footprint associated with car manufacturers, products being the car. With your technology, can you claim to be the greenest battery? Because there are battery recycling companies out there, you’re not the only battery recycling company out there, but are you saying you are the cleanest or you have got scale? What’s your USP?

Chris Reed: If you have a look, and people say recycling and it covers a lot of business models. In Australia, people say, I’m battery recycling. And really what they’re doing is taking the batteries, they’re deactivating, they’re shredding them and they’re separating out casings, foils, plastic and the black mass and the black mass is going offshore. And then you can go to Europe, with some of our competitors, who are using traditional pyro-metallurgy routes. They would take either the battery or the black mass and basically melt it. You would incinerate the graphite, which is about 50% of the mass. The plastics, the electrolyte hydrocarbon that’s bearing the Lithium. And so instantaneously you are below 50% recoveries. Whereas the EU Battery Directive is heading towards higher than 85% recovery, which is where our process is now. We’re hoping to get well into the nineties.

Our process has higher recoveries. And if you have a look at, as Elon said: more efficient, and even if you go to Rob Friedland’s comments last week about his high-grade Copper in the Congo, which will also need to go on the batteries, he has got a 10% grade. If you compare that to a 1% grade, say in a big bulk Chilean operation, you have to mine 10x less ore – that has a lower footprint. And then when you put that in your processing plant, you have to process 10x less ore to get a ton of Copper. It is just arithmetic. It then follows, if I’ve got a battery, the battery has the highest purity, metal oxides, or metal sulphides to get converted to metal oxides that you can get. The metals that are in there were high purity. And we’re recovering. If I have a look at an Apple battery, by weight it is 20% Cobalt. It has got incredible value: USD$6,000, USD$7,000 p/t of the ancillary stuff. That is incredible. If you had a look on a Gold basis, that’s 3oz p/t, right? There’s fat in it.

Our process is, is not the cheapest. The cheapest would be just burning them, but they then have to factor the losses in. And so, we are confident that we have almost a future-proof process. And it is a technology, so we have to look at what the market wants in the future. They will need get down to ‘net zero carbon’.

And if you have a look at so you buy an internal combustion engine or a car, a normal car with an internal combustion engine, it has a lower carbon footprint from the EV. What’s different in the car? One has got a battery, ergo that difference is in the battery. And the battery, it is mainly materials, otherwise it is electricity and robots and a bit of labour. It is in the materials where the carbon is. And if you can recover that, recycle, recover, produce a secondary material, you massively reduce the carbon footprint. And then all of a sudden, the EV is not as far behind the internal combustion car so you actually can get to what the car makers want.

Matthew Gordon: That’s good for me. Because we have talked about some of the variables, which I needed to understand, the macro component, which is what you’re working towards. What technology you have got, and what you’re you think you’re going to be able to capture? Can we just talk about the deal then? Okay – so SMS – big company. 1) why on earth would they team up with a small Australian company? 2) once you have explained that, talk to us about how has the deal been broken down? Who gets what? Who provides what? What are both sides bringing to the table?

Jeremy McManus: At a high level, Matt, the way the deal works is, we have worked for years on the technology, and that’s patent pending. And there’s a chemistry flow sheet there, which, we have covered it for a long time. We bring that into the equation and what SMS bring to the table. Again, this is at a high level, but they bring the ability to help us design, build, operate, and maintain that very complex plant. And that’s one of the key reasons why we’re keen to partner with them because ultimately if you want to appeal to the world’s biggest OEMs, they need some confidence that you can get this done. Having a neat technology is great, but actually having the ability to deliver. And there’s lots of USPs associated with our technology, but really the thing that’s most interesting about it is actually the business case itself, and having SMS on board is probably one of the biggest ticks because it means this has a chance of actually happening.

So, in terms of how else does this deal look? We’re looking to share the costs as we evaluate through building a demonstration facility in the heart of Germany. That allows potential partners and others to touch and feel and look at this showcase, see what comes out the backend and evaluate products. We will do a Feasibility Study in parallel with all of that. We will get a stronger grip than we already have on the economics. And ultimately we will make a decision to roll this out commercially, and Europe looks like an interesting place to start doing this, but of course, we need to attract the people with the feed, which we’re busy doing already. And also the people who are going to buy and take in a binding off-take sense for us to make a decision to go ahead and build commercial plants.

Matthew Gordon: Talk to me about it, so what does the deal construct look like? And are you happy with the terms or are you the smaller partner in all of this?

Jeremy McManus: Yes, well, it took a very long time to get to this place, as you would expect with a German company. That diligence was really, really thorough.  most people would see that as a very good thing because no stone has been left unturned with our partners. But yes, we’re exceptionally happy with the deal. It was negotiated very hard, but it is certainly fair to both parties. And we see both parties bringing a lot to the table. SMS can’t do this without us. We have to transfer technology, we have all the insights thus far, but we really do need a presence in Europe, the networks, which pull up with very big OEMs. And even just having a permitted site to demonstrate this, a lot of this is probably lost on people that don’t live and breathe it, but that’s hard to do and it is super time-consuming in the middle of COVID. So there is a fair bit to all of that, that screamed to us that we need to go ahead with this deal.

Matthew Gordon: Give me the terms of the deal. What is it going to cost you? What are your liabilities until you get to a point where there’s an FID on whether to move forward or not? Have you got the money?

Chris Reed: Yes. I can jump in here. We are very well-funded. We have got about AUD$85M in cash and listed investments, no debt – that’s Aussie dollars. So, €50M. In terms of the funding requirement for both SMS and Neo Metals through to the FID, the approved budget is €4M. In terms of moving into our first deployment into Europe, one of the terms of the deal was that SMS uses its best endeavours to procure German government-backed finance. And in terms of funding, our equity contribution, we’re completely able to do that off our own balance sheet with no dilution.

There’s a seamless path in terms of activities: both technical and economic and commercial. In terms of financing, we are good. We financed our entire contribution without debt, still off our own balance sheet. So, we have good flexibility there. It is roughly an 18-month funding requirement and our chip-in is €2M.

Obviously, all of our staff, labour, time. The joint venture will acquire our full commercial scale shredding or combination circuit. In terms of when we make a decision to commercialise, we can actually start up shredding and beneficiation well ahead of building a matching hydromet plant.

Matthew Gordon: Let me be clear, Chris, because we have had the questions sent in and so I want to be really clear: you are a project developer company. Your model is to fund those through to FID. But the company, at that point, whether they be JVs or otherwise will need to stand on their own two feet that, these are commercial operations, which you have got with partners. That seems to be your model. You develop a flow sheet, you bring in a big partner and then you make a decision whether to advance the project or not, jointly. But at that point, you go to market looking for debt or equity for that entity, and that does not affect the balance sheet or the ability of Neo Metals to continue with this current model?

Chris Reed: We have got total flexibility. Obviously, this project is the closest to cashflow for Neo Metals as a combined entity. It is more likely to stay in the group in terms of, we would love a cashflow-generating asset. We sold our last cashflow-generating asset last year, but banked a lot of cash at the front end of that. And the performance of the Lithium chemical prices, the Spodumene price is probably a third of what it was when we sold. So that vindicated that decision to sell early. And then what we have done with our extensive cash resources, as we have continued to share that; we have had five annual dividends back to the shareholders. We have returned more than AUD$55M in dividends and capital returns. We are cognisant of the importance of capital, particularly as you’re going into something like COVID-19. Now they are individually set up to, to be sell financing and non-dilutive, if we so choose, or we can embrace it. And certainly the Lithium battery recycling, we would embrace that as our first cash flow assets.

In terms of the other projects, they all have strong partners. They are all co-funded through the final stages of evaluation into FIDS. And we have complete flexibility whether they move in or out of the group, we can give them back to the shareholders, via an inspecie distribution. We could separately list them, raise capital, raise debt. Having such a strong balance sheet and no debt and a pipeline of projects that are getting to FIDS at the end of 2021, 2022, 2023, 2024. There is a pipeline of projects. , obviously we can’t fund all of them off the balance sheet, but the highest return with the lowest capital investment is going to get the first nod.

Matthew Gordon: Sorry to dig down on this one, but again, we have just had so much feedback from the market. You have been dishing out dividends. You did one recently, a big distribution. Your shareholders are probably happy, you would expect, but some of them came back and say, are these guys cognisant of the fact that we perhaps would rather have the security of knowing that the next project is going to get done, then have dividends. That’s a big group of people out of the shareholders going: keep your money, Chris. I want you to get this deal over the line. What are the discussions at board level around how you manage the capital that you have got?

Chris Reed: It goes through a very comprehensive process, a very highly experienced board. And we are very cognisant of what dilution costs to get projects. We are also aware of our weighted average cost of capital. We are also aware that if you do not have an immediate need, if you’re getting up to it and, you’re going to make the FID, it is different. These projects are advanced, but they’re still in the final stages. You have to have an equal balance. It is the shareholders’ cash. If I have not got a plan to deploy all of it, and we have given that over a 5-year period. So clearly we haven’t had the investments that have needed to be made. And we have taken the decision to return that cash to its rightful owners, which is the shareholders. Unless you have got a better use, right? If I can’t earn my weighted average cost of capital, or if my cost of dilution for an event coming up, then I shouldn’t pay it out, but we do go through a very detailed process.

Matthew Gordon: Do you think that this whole ESG movement is getting more traction now? I know you have been at it for 2, 3-years. You guys spotted it 2, 3-years ago and segued the business over it. Was there any point at which you are going, ‘crikey, I’m not sure people are going to pick up on this thematic other than just the nod to doing things the right way’?

Chris Reed:  it has probably just, just caught up. Look – my family has been involved in the mining industry for more than a hundred years, so we have developed precious metal mines. We have done industrial metals mines. We have explored for base metals. The thematic in there for us, the thematic of minerals and materials for a sustainable future then defines the commodities that you should target. And then you have a look at, okay, well, if I was going to get this out of minerals, what are the trends? And if I have a look at just general minerals projects around the world, the grades are getting lower and they’re getting deeper, ergo, the mining cost per unit of output are going up. And unless you can work out a way to actually change the physical location of your ore body, enrich it and make it closer to the surface, that trend is immutable.

So for us, we thought, well, the only way really that we can level the playing field is to try to innovate on the processing side. And, hence, we had a look at recycling and then we have had a look at Vanadium recovery. And from our background, our background has been in minerals. We were in Lithium minerals, Lithium chemicals. And this is just the next progression. It is producing these chemicals, but without the mine, and so it is lower risk, lower time, lower uncertainty, and hence, we know what’s in the batteries when we process them. With perhaps the Vanadium recovery project we know what the Vanadium grade is in the slag, they see exceptional grade. And if you do your studies right, and we are diligent in our studies, if you have got the grades, the feed grades right, you shouldn’t have massive fluctuations in your operating costs.

Where a lot of these projects go wrong is in the mining: everyone wants them a certain size, and you have got to do your evaluation studies in a certain period of time. And we cut corners. And the results vary a long way away from these Feasibility Studies. But essentially, they rush the front bit and we don’t run that. We don’t rush the front bit. We want to get it right, and we want to get it right. And we want to bring in big partners. We want to get the highest return on capital in the shortest period of time. The board and management of the biggest shareholders in the company. And we want to make our money and share it with our shareholders. That’s what we do.

Matthew Gordon: At some point you are going to need to raise some capital. It is all well and good Tesla saying, ‘give me green, efficient, name the commodity, right? Lithium, Nickel’. And it is all well and good. Your conversations with automotive manufacturers saying, we need to address our carbon footprint, but when it comes down to raising the money, do you think that the funds care? Are they going to give you extra attention because you have got a greener solution? Do you think you are going to be able to raise the capital based on the economics you’re going to be able to achieve?

Chris Reed: Whether or not they are green or not, none of those green funds like losing money, and neither do we. So, you will find in the discount rates we use for the battery recycling, we use a 12% discount rate. We are here to get these projects built. We’re not trying to coddle them to get some outcome in the market. If we need to go and raise the money we will. We have raised equity and debt, probably in the order of USD$180M to $200M over the life of the company, overdue areas, projects, and always paid our debt back. If you do what you say what you say you were going to do with the money and you are open and transparent. I can’t see any reason why we wouldn’t be able to. We haven’t done it for a while. We haven’t raised money for seven or eight years, but that’s not to say that. That’s good I would’ve thought,

Matthew Gordon: Well, it is good, but that’s what : at some point you are going to need to go to market, presumably, in Oz or in Europe.

Chris Reed: We’re not scared of that. If you have a look at the portfolio, our shareholders have four projects, now, if I give it back to them in an end-share distribution, you can either put more money in it. If you don’t want to put more money in it, we have to bring in new money and some debt, you still own the same amount as if I kept it in the head company and did the same thing. Right. But you don’t want to dilute four projects. So, you want to keep your best projects, right. And the ones that have the tightest strategic focus. There’s nothing wrong. Just because we have got a big portfolio, I can return those back to the shareholders. We could do spin outs. You could do any number of corporate finance moves on it.

Matthew Gordon: So at what point, I know you said you’re going to be doing a Feasibility Study for this project going forward, and you will get a better sense of the economics and cost and so forth and efficiencies. What’s the timing of all of that? Because if I look at your business as a whole, people go, certainly the feedback we get: these are smart guys. They are good operators, they are efficient operators and they are straight talking. What they’re trying to do is get a line of sight and go look, how do I start to quantify or value or evaluate these four projects coming down the line? I know 2021, 2022, 2023, 2024 is great. But what do they equate to? Are you going to be able to start giving us and sharing with us that those sorts of numbers going forward?

Chris Reed: Yes, absolutely. We have 4 advanced projects. They are in feasibility and then moving into feed. So, these studies take 12 or 18-months and then they just land. They’re designed to land as we know them too, but essentially, we’ll have Feasibility Studies landing and then moving into feeds for some of the projects, but you will have them landing sequentially. So, we go through a disciplined process of Scoping, Pre-feasibility, Feasibility and then front-end engineering and design. We don’t cut corners.

Matthew Gordon: Help me with the numbers.

Chris Reed: We will be able to put metrics into the market, and if I’m spending the shareholders’ money, I need to tell them why. I need to tell them what the risks and rewards are. And they need to know that because they need to know whether, and I might put it into another company and I might ask them to put more money in and they have a choice whether to, or not, but they need to understand the risks and the reward. We go to some length to share that with them.

Matthew Gordon: So when can we expect you to start adding a bit more colour to the sequence of projects?

Chris Reed: We could certainly provide a consolidated timeline for the various projects to you. Over a long period on a quarterly basis is there’s quite a lot of events. But, for the battery recycling, you’ll have a Class 4, Class 3 Study. Now what we might do is, when I said we will share the risks and rewards, we’ll tell you what the operating and capital costs are. We might not tell you exactly what the financial model looks like because, there are often there some commercial in confidence elements about that. It is not like if you have got a mine; if you have got a mine and you are opening the mine, you can be completely transparent about everything, right? Because no-one is going to come in and take it off your hands. But this is a technology where I’ve got to go in and I’ve got to compete. I don’t want to tell the wider market anything that might prejudice the actual success of the business. People will have to just bear with us then, but just suffice to say, we have put out a Scoping Study, that has got enough data in there where you can work out a financial model. You can work out the operating costs. We have given you the capital cost. We have given you the assumptions on the battery mix, the pricing assumptions. An educated analyst could come up with a number that’s probably 5% of what our management model looks like.

In terms of what the pilot plant told us, we surpassed our expectations. So you can have a look at the Scoping Study and hold those going forward with some confidence.

Matthew Gordon: As a retail, family office investor, we need to get a sense of those numbers. My comfort comes from someone like SMS, a multibillion dollar operation, doesn’t go and do a deal with a small Ozzy company if it doesn’t think it is going to make a lot of money. And I also get that there’s enough data around to be able to create some crude model about what the opportunity is.

Chris Reed: 4 of our other projects, from the Vanadium recovery, the Lithium refinery and Barrambi, we are more explicit. So, for the Vanadium recovery project, we put out a Scoping Study last quarter. We will put out the Pre-feasibility mid next year. We’ll put out the final Feasibility mid the following year, we will make an investment decision and then you’ll have a timeline. For the traditional projects where there’s a known feedstock source secured, I’m happy lifting the skirt, so to speak. The battery recycling one, I just do need to be a little careful. It is a bit like Mount Marion, we developed what is the world’s second largest source of hard rock Lithium units. We never published a resource. We never published a reserve and we never published results of any Feasibility Study because we were negotiating with the Chinese. Only one country by Spodumene, that’s China. The last thing you can do is tell them your costs. If I’m trying to go into the EV market in Europe, these guys love beating suppliers up. I don’t want to tell them everything.

Matthew Gordon: Great catch up, Chris, a great story and well done on the JV. I’m excited to hear what happens next.

Chris Reed: So are we. A demonstration plant is starting up in the new year in the centre of Germany at one at SMS’s has production facilities. The procurement activities are highly advanced. We’ll start construction probably towards the end of September as the European summer starts to wind down and everyone gets a back into the swing of things and do the demonstration plant in the March quarter. We will then do the engineering and Feasibility and commercial in parallel. Come Christmas next year. It is hopefully going to be good times.

Matthew Gordon: Chris, I appreciate the update, Jeremy – thanks so much. Good to speak to both of you as always. Pick up the phone if there is some new news. Thank you.

Chris Reed: Excellent. You have a fantastic day.

Company Website: https://www.neometals.com.au/

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Maverix Metals (MMX) – Royalty Company Continues Rapid Growth (Transcript)

Maverix Metals Inc.
  • TSX, NYSE: MMX
  • Shares Outstanding: 128M
  • Share price C$6.12 (10.08.2020)
  • Market Cap: C$784M

Interview with Ryan McIntyre, President of Maverix Metals (TSX, NYSE: MMX)

READ ARTICLE FOR THIS INTERVIEW HERE

Maverix Metals is a precious-metals-focussed royalty company that we last spoke to in January. It has advanced a great deal since then and now has a market cap of over C$800M. Maverix Metals is now a mid-tier royalty company, and it could be an attractive takeout proposition for a major. The company revenue sits at around C$40M from 13 different projects with 92 projects following up behind.

The royalty portfolio has really taken shape over the last 6-months, and McIntyre was keen to tell us about Maverix Metals’ business strategy going forward. Royalty investors will be hoping for more growth. We also touch on the recently renegotiated royalty package with Karora Resources at Beta Hunt, one of the company’s most important royalties.

We Discuss:

  1. 2:45 – Company Overview
  2. 3:36 – Developing the Business Plan: Competition and Future Growth
  3. 8:15 – Building Value for Shareholders
  4. 10:56 – Cash-flow Generation and Revenue
  5. 13:30 – Project Timelines Quickening: A View of the Bull Market
  6. 14:32 – Impact of COVID-19
  7. 15:28 – Negotiations with Karora Resources: Time and Terms
  8. 19:04 – Maverix and TMAC: What’s the Situation?
  9. 20:49 – Performance Reflection: Them vs Peers
  10. 22:53 – All About M&A: Route to Growth or Slow Down?
  11. 25:28 – Addressing Liquidity
  12. 27:05 – Why Choose Maverix Over Any Other Royalty Company?

CLICK HERE to watch the full interview.

Matthew Gordon: Hey, Ryan, how are you doing?

Ryan McIntyre: I’m good. How are things in England there?

Matthew Gordon: We are surviving, Ryan. We are surviving. I went to London. It scared the hell out of me. I came running straight home. What about you? You’re normally in New York, aren’t you? How are things there?

Ryan McIntyre: Yes, I am just outside of New York, in Connecticut, but I haven’t been to New York since March. So keeping safe out here.

Matthew Gordon: I haven’t seen you since January, so things are busy. We’re going to hear about that in a second, and you were a relatively newbie then as well, weren’t you?

Ryan McIntyre: Yes, I just joined at the end of November, so pretty fresh into the role there.

Matthew Gordon: Why don’t we kick off with that usual one-minute overview of the business then we’ll pick it up from there.

Ryan McIntyre: Maverix Metals is a precious metals Royalty company. We’ve got 105 assets in total. We’ve got 13 paying, and our whole goal is basically to continue to buy Royalties & streams with a strong focus on Gold with a little bit of Silver as well, and that’s really our strategy.

Matthew Gordon: We have interviewed quite a few Royalty companies recently. They are getting a lot of publicity because  people are seeing that obviously, the precious metal market is going a little bit crazy, most of you guys are focused on precious metals. I want to take it back a bit, again, for people who may be new to this story, you’re nearly a big boy now at a USD$900M market cap, but it may be a new story to some people. Let’s talk about what you guys set out to do and then what you were brought on board to do. Why did you come on to the team?

Ryan McIntyre: Just to give some people some history: Maverix was started in mid-2016. Pan-American Silver basically vended in their Royalties into Maverix and basically took a large equity stake. And, over those 4-years we’ve done 10 separate transactions in terms of buying Royalties and Streams. And  the one that we’ve been most notable for is acquiring Royalty portfolios from some of the largest Gold mining companies and Silver companies in the world. We’ve done, obviously Pan-American Silver, followed that up with Goldfields, and then we did Newmont. And then at the end of last year, perfectly timed, we did Peter Ross’s Royalty portfolio as well, and they all have big equity stakes in Maverix.

Matthew Gordon: So Ryan, you have got quite a few big names involved there: the Ross Beatys of this world, Eric Sprott, and with Kinross, Newmont and Pan-American, this is fantastic, but it’s a very highly competitive environment that you are now stepping into. You’ve got some of the bigger players who have a USD$5Bn+ market cap, and you’re going to try to compete with these guys. How do some of the names that you are now working with enable you to get deals that perhaps are just that little bit more competitive?

Ryan McIntyre:  there’s a couple of things that we have got.  obviously, the connections with some of those large players that I just previously mentioned is critical. A) we get deal flow from the directly. There’s a great dialogue. Obviously we’ve got someone from Pan-American and Newmont on our board, and  there’s certainly a pretty good dialogue back and forth, just from a deal perspective and also from a technical perspective. If we have got questions about various assets that we’re looking at, we can always bounce some questions off of those guys. So that’s been hugely helpful. And they’ve also basically vetted us as a company to the extent that there are other Royalty portfolios out there, they are looking for a home, they would look at those endorsements by some of those large players as very positive. And  you’ve seen that with the four we’ve done, and hopefully we can do a few more of those.

Matthew Gordon: But what do you do going forward? Do you have to keep picking up large portfolio-type plays, or do you just go after bigger Royalties and where you find these? It gets harder and harder as you move up the food chain, right? Where do you find these?

Ryan McIntyre: Yes, that’s actually another good point; actually, we are at that size now where a new Royalty or Stream actually is meaningful to us regardless of its size, almost. Anything +USD$50M is actually really meaningful to us. And there are actually quite a few of those deals to be had versus, there are only a few billion dollar deals, although they do exist. But that is a good point because at some point as we grow, we will run into that problem where we need to get bigger Royalties or Streams coming on board, but we’ve got a lot of runway before that. We don’t really see that as a problem at the minute.

Matthew Gordon: It’s not a problem at the minute, but you need to set yourself up properly. Because we’ve looked at some of the bigger Royalty companies, and I won’t mention names, but if you look at their share prices, they are really, really struggling. And it seems to be a big disconnect between what they are doing corporately and what they are doing for shareholders, and money seems to be, you’re making money a lot of money, but it is being ploughed back into deals, ploughed back into the ground with ever expanding big ideas. But at the end of the day, I’m a shareholder. I make my money if the price of the shares go up. How do you ensure that you don’t make the same mistakes that have been done by people who have trodden the path before you?

Ryan McIntyre:  the great thing is that at Maverix, we have a lot of experience in this space. So myself, and Daniel Flaherty, who is the CEO of Maverix, we were actually working on some of the original streaming deals back in the early 2000s on the investment banking side. And it’s interesting; we have actually seen things evolve over the past +15-years. And the size of the market has also grown a lot.  15-years ago, the market cap of the entire space was about USD$5Bn. Now it’s about USD$60Bn, and that’s not surprising at all because it is a great business model and the returns have been good. It’s not surprising that there have been new entrants and things, but  the one thing that we’re always focused on is really doing good deals that are accretive for our shareholders. We’re looking to increase NAV per share, cash flow per share, and consequently dividends we’d expect to grow per share as well as time goes on. And the other aspect also is trying to shrink the valuation differential between ourselves and the larger players. And there’s a 2-way, 2-pronged approach here at Maverix to move that share price up for our shareholders. And  it should be noted too, that Maverix insiders own about 10% of the business. We are 100% focused on shareholders and we will do whatever it takes to get that share price up.

Matthew Gordon: But at the same time, you guys are picking up salaries and options and warrants and all sorts of wonderful things as well. It doesn’t matter as much to you as it does for shareholders. Talk to me about some of those ratios and why they matter and why you’re focused on them?

Ryan McIntyre:  Well,  the biggest thing, for any investor, having spent the last, basically 11 or 12-years at Tocqueville Asset Management, where I was an investor professionally,  the one key thing is you have got to increase cash flow per share and net asset value per share over time. That is the real fundamental business value of the company. And my view is, if you do that the share price might not follow immediately, but it will eventually and that’s what we are focused on the medium and long-term.

Matthew Gordon: I’m going to refer back to some of the larger Royalty companies that we have looked at. They have got cash flow coming out of there yin yang. They are making money. It’s not flowing down to shareholders. I don’t expect you to answer for them, but what I do expect you to do is acknowledge that companies get to a size where they become less efficient, and someone new comes into the company, coming in with fresh eyes, and given your investor background, how do you ensure you  stay on the straight and the narrow and are focused very much towards the shareholders be that institutional, retail or family office?

Ryan McIntyre: Well, we are certainly incentivised that way. Just given that our largest shareholders are on our board as well. They also direct how we conduct our business. But  it is just the mindset of the people in the business. If you look at Jeff Burns, our Chairman, he was the CEO of Pan-American Silver for a dozen years. And, maybe on the investment side, we really have this energy focused on shareholders because having sat on the other side of the chair for a long period of time, we observed what works, what doesn’t work, what resonates, what doesn’t and what really adds value and doesn’t. And we are really just trying to isolate those types of factors as best we can and focus on those types of things for our investors. And the very fact that we do own a lot of the business is critical, but  more than that, we are intrinsically motivated ourselves. We really care about the shareholders and we’re going to do what’s right for them.

Matthew Gordon: Let’s move on to one of the points you made: cash flow. You have got, was it 13 producing assets at the moment? Varying degrees of producing, and you have got a lot sitting behind that. That’s the inflection point that most people are looking for. So let’s talk about the producing components now; so break that down for us and, what more has to come from the current paying asset?

Ryan McIntyre: Yes, sure. We’ve got 13 paying assets currently. This year we’ll probably generate something, the order of USD$40M in revenue from Royalties and Streams this year. And the interesting thing about that is it’s really well-diversified from a country basis. Good jurisdictions. You’re talking about 80% plus coming from Canada, US, Mexico and Australia. And then the other thing to note is that it’s three quarters Gold, basically 20% Silver and a little bit, minor parts of Copper, Zinc and Lead. So very peer play focused on Gold and Silver, basically.  we’re very, very comfortable here.

Matthew Gordon: And what is coming up behind it? Is that a similar profile?

Ryan McIntyre: Yes, actually, very similar, probably, actually even more Gold-weighted specifically and actually probably more US-weighted as well if you look at some of our near-term big ones. Probably the next couple that come off for us is the Greenfields project, Jim fields. We’ve got a 5% Royalty on this open pit heap leach project in Nevada that should produce about 125,000oz p/a. And so that is fully permitted, and  there’s just a sales process that is going to get underway pretty shortly here on that one. And then there is another one coming off the ranks as well – Kensington, where we have a 2.5% Royalty that we picked up from the Kinross portfolio acquisition at the end of last year. And what’s interesting about that one is that at the time of acquisition the Royalty only kicks in once Core Mining, who is the owner of Kensington, the Royalty only kicks in when Core recoups its capital, and the Royalty is based on revenues so once that capital is recouped, it starts paying 2.5% of revenue. And  the critical thing is, when we were looking at it initially, the capital that had to be recouped, we expected to take five or 6-years at that Gold price. But if you look at today’s Gold price, you’re now talking about three years until it starts paying us. And it’s a huge, huge difference for how we thought about it when we bought it, and what the Gold price can do to our portfolio just given that we’ve got a number of those things in the development phase, in our portfolio.

Matthew Gordon: You really are benefiting from this Gold bull run. The price of Gold and Silver, in getting there, helping immensely with the ability of some of these assets to get financed, to move things forward possibly quicker than you had imagined.

Ryan McIntyre: Yes, absolutely.  we have benefited from a few things. Obviously the commodity price is one of them, but also from the permitting side as well,  some countries have sped that up a little bit. We had one come on recently, actually on the Esperanza project, which is owned by Kingsgate Consolidated, where we’ve got a 2% to 3% Royalty on it. And the project is about a 90,000oz Gold equivalent type project and Chile. They just got their EIA the other week and we have been waiting for that for a year or two.  having that come through is also another huge positive. It’s shovel ready as well.

Matthew Gordon: Given that it is USD$40M revenue at the moment, it’s not huge. There’s more to come as well is what you’re going to be telling us. COVID has not had a significant impact on your revenues and has not restricted your ability to do business?

Ryan McIntyre: Yes, it’s interesting. So for the first month or so there, we were focused inward on our business, looking at what was in our portfolio, and  a lot of the companies that we were talking about with acquisitions and that type of thing, we’re doing the same. Everyone is re-evaluating their strategies. That put us on a hold, I’d say, for a month, maybe two months. But since mid-May, we have been extremely busy. There is a lot of stuff to do in the in the market.  with commodity prices moving up, people want to develop a Gold project specifically. And, we’ve got a lot of those in our portfolio. We’ve got 92 assets that aren’t currently paying, and you can see those move forward and you can see people raising money for them; either drilling them or starting initial economic study work, that type of thing. There’s a lot going on, I would say on our end.

Matthew Gordon: I want to talk to you about something which Dan brought up when he was on, back in January, around 20th January or so, or he gave an example, I know you were a new guy then, but he gave an example of the way that you guys went about negotiating deals. And you you’ve mentioned what was then called RNC Minerals, now called Karora Minerals, and you have just completed a deal there. And at the time, it was, we’ll do what’s the right thing for our shareholders, and obviously it has got to work from both sides, et cetera, that took an awful long time to put together. What was the hold up?

Ryan McIntyre: It did. It did take a while, actually. A lot longer than  probably both sides would have thought, but we came out with the right solution in the end. So basically we originally had a 7.5% Gold Royalty on Beta Hunt, which basically represents half of the Higginsville complex operated by Karora. The thinking initially was that it was a Nickel deposit, and so that 7.5% actually, they thought the gold was the by-product. And it was a high Royalty, Paul has mentioned that in your interviews as well. And we had to view the whole transaction as what could be a win-win for both. And from our side, we wanted to get reasonable value for it, and obviously, Paul wanted the lower of the cost structure there, but ultimately what it does is it really unlocks the exploration potential part of it. , they don’t have the hang up of, what’s perceived to be a really high Royalty on the Beta Hunt side. And for us we still own the other 4.75% of it. So we still are hugely exposed to it. And the one thing that people should remember too, this is a great illustration of the Royalty model and our business model at Maverix, where we only put in about USD$15M assembling that 7.5% Royalty over the past four years. We’ve already recouped 120% of that in cash flow today. And we just sold basically a third of it to Karora for USD$18M. We have earned a couple of multiples on our initial investment and we hope it incentivises Karora to do even more there on the Beta Hunt side. Because if you look at the exploration potential there it’s pretty exciting and they’ve done a great job as well, probably should be mentioned. And we’re expecting pretty big things out of that. I would guess that Beta Hunt will actually be doing a lot better than people expect in the future.

Matthew Gordon: And then the deal got slightly more complicated with the entrance of the Eric Sprott component to the deal.

Ryan McIntyre: Yes. Yes.

Matthew Gordon: Obviously he’s a big shareholder with you guys as well. How did all that come about?

Ryan McIntyre: Yes, it’s interesting actually. The initial deal was for, we were going to bring on USD$5M in cash from them and USD$13M worth of shares. And we were happy to take their shares given that we did see upside. But when you have a great investor like that come along and bolster the situation of Karora, just from a marketing standpoint, from a validation standpoint it was well worthwhile for us to work with our operating partners. We always try to put them in the best possible position to succeed because that only helps us and our shareholders. And so it was a perfect result for everybody because now you have a lot more eyeballs on Karora, I would say, today and you will have more investment money flowing into Beta Hunt where we still retain a 4.75% Royalty. We’re hugely incentivised to see that one continued to do really well.

Matthew Gordon: I’m glad that it eventually got done. The market was wondering what was happening. I’m sure there’s some hard negotiation going on. Can I talk about TMAC, if you don’t mind, obviously with Shandong Gold involved, what’s your take on what’s going on there? How that’s going to work out? Do you rate that deal?

Ryan McIntyre: Yes, that’s interesting. So, we’ve got a 2.5% Royalty on the Hope Bay property, and TMAC, obviously is in the midst of a deal with Shandong, and it’s gotten, all the major approvals except for the major one from the Canadian government. And, that’s the one everyone’s watching, obviously. It’s a bit of a black box, so I don’t think too many people know what’s going on unless you’re really on the inside there. But I guess from our perspective, the way we look at, our 2.5% Royalty, if you just kept the mine as it was operating, it produce about 125,000oz p/a. Around USD$5M revenue Royalty does. And, with a new player coming in like Shandong, what the operation is really missing is scale. And Shandong can deliver that by deploying more money into the business there. And for us, the way we look at it is if Shandong is successful, it is highly likely that they will basically double the size of throughput there. So our USD$5M Royalty will turn into USD$10M+ a year in terms of Royalty revenue. And the one thing that’s interesting too, is the Gold price has changed a lot since that deal was struck. And so notwithstanding the notion that Shandong and TMAC are in the middle of the transaction, but clearly the asset has become much more valuable since that deal was struck only a few months ago. So that should be very good for everybody.

Matthew Gordon: Are you worried at all about how you are performing in relation to your peers at the moment? Do you feel your performance is reflective of what you are doing?

Ryan McIntyre: No. The short answer is no. It’s interesting. So, everyone, got I hit during the COVID pandemic – not unusual. And then we obviously came back with everybody, but in the past couple of months for starters, we did the Pan-American secondary. So Pan-American had 5-year warrants that were issued basically upon inception of Maverix, and they expired next year. And we had some investor interest and we basically convinced Pan-American to basically sell their warrants off, or exercise their warrants and sell the shares, technically. And what happened there is basically that was a pretty large chunk of our market cap. And so basically, you had some entrants come in and out of the stock there, and it churned for a little while. And as soon as that deal was closed, you had basically a month there where it was seesawing up and down. And it was only recently actually where we started to re-establish that momentum that we had before, where the shares are now flushed out. I was actually buying some shares a couple of weeks ago. We are fully confident that the business is going to do really well. And there is a huge disconnect, in our share price in particular, versus some of our peers, but more specifically, it just, we can see that our business is doing really well and is clearly worth more than it was before the pandemic especially on the development part of our portfolio where we’ve got 92 things that aren’t in production for us. We see a lot of those things moving forward and our shares are a lot more valuable now than they were back then. People will recognise that at some point, but it’s our job to put that in front of people and to make sure that people do recognise that value.

Matthew Gordon: Can I just ask you a question about some of the new entrants coming into this space? We have seen a lot of small, private companies coming in, a lot of small Royalty companies listing, etc, and they are hoping to work their way up that food chain as you guys have done. But is there a shortcut to this process? Is there, roll-ups or acquisitions that can be made?

Ryan McIntyre: Well you’re right. We definitely have seen a lot of new entrants come into the space on the smaller end. And, in the short term, I don’t see much in the way of consolidation within this space, Royalty space. But over the long term, that it is likely. There is a certain amount of scale that is required in the business, and frankly, given the multiple differentials between some of the smaller guys and the larger guys, there certainly is an arbitrage there to be had. So that will certainly happen in the future. From a Maverick’s perspective there are a lot of deals to be had now, so we don’t see that at the minute, but from Maverick’s perspective, we’re happy to be the acquiror or be acquired.  we will do whatever is good for our shareholders. And if we see an opportunity that’s worthwhile to do we’ll do it, and if we’re the opportunity, then that’s fine too. As long as we can get the value to our shareholders, that’s the only thing we’re focused on.

Matthew Gordon: Is there a cycle to it? Because the big guys like to take the little guys out because they become a pain in the side.

Ryan McIntyre: History has shown that the larger guys do actually go after the smaller guys. And typically, it is in an environment where there are fewer individual Royalties and Streams to be done. And we are certainly likely to see that happen again. And, given where Maverix is, and if our valuation stays where it is, we could be at risk from that standpoint.

Matthew Gordon: Does the M&A component slow things down for you? Does it affect your business model when all of this is going on in the market?

Ryan McIntyre: Well, certainly from an equity perspective in terms of the amounts that are able to be raised now, that does dampen the ability to, , basically get new Royalties and things on new projects and so forth, just given that it’s another source of capital, it’s competition. So that is fine.

With the M&A side, it is interesting and actually works on both sides because with more deals comes potential for more financing needs as well. We are part of that capital solution and from our standpoint, we’re more than happy to participate in M&A if we can help out someone acquire something or if we have a Royalty on something that someone is looking to acquire

Matthew Gordon: Let’s talk about trading liquidity: that has often been a problem for some of the smaller guys. Do you see that as a difficulty for you moving forward?

Ryan McIntyre: I would have said yes a year ago. We basically traded very thinly a year ago, but a couple of things have changed since then. For starters, we have graduated from the TSX venture exchange to the TSX, mid last year, and basically in concert with that, we also listed in the US on the NYSE American, and both of those things have had a notable impact on our trading liquidity. But it still really didn’t get us there, in terms of having real volume where institutions could step in in a big way. But, one thing that has changed that is the PanAmerican secondary offering that was done at the end of May, that actually has changed our volumes pretty significantly, actually. It should be noted that we’re not listed on any index or in any ETF currently. And the only reason really is because we don’t really have the trading liquidity, or we didn’t. But if you actually look at it today, we actually do currently meet the trading liquidity requirements for things like the GDXJ and so, but it takes 3 consecutive quarters. And by our calculations, we expect that, basically in the first half 2021, it is likely that will be included at least in 1 or 2 indices and ETFs. So that should be a pretty big thing for Maverix and its shareholders. And part of the thing that we view as closing the value gap between ourselves and some of the other players.

Matthew Gordon: And you think that’s sustaining – you think you will get there?

Ryan McIntyre: We are there currently. And so as long as we can sustain it, we will get there. Yes.

Matthew Gordon: Big question, just to finish off, if you don’t mind. So, we have talked to a lot of Royalty companies recently. They are all unique. You have all got your own strategy, your own view of the world. Why am I picking your Royalty company above some of the smaller ones who have perhaps got a little bit more leverage to them if things work?

Ryan McIntyre: Yes, they are really two main factors. The first one is the people.  If you look at our board, if you look at our shareholders, if you look at our management team, we’re extremely strong across all those levels. And, from our perspective, one of the things that really differentiates Maverix is having the access to help from Newmont, PanAmerican, Kinross and our broad network. And the other aspect is we’re not so small that we can’t compete against others. But we’re not so large where a small Royalty does, it is not meaningful to us. And so we really view ourselves as actually in the sweet spot of activity where a new Royalty added for us is really meaningful yet we can do a lot of different things given our size, and frankly, given our diversification, we’ve got 13 paying assets, we’ve got 92 that aren’t paying, diversified across all the different stages of development. Some near-term, mid-term, long-term, and some options in far off to the future. So we’re really well positioned.

Matthew Gordon: And you are happy with your debt position? Future revenues coming in from these 92, you think you’ve got that balance right?

Ryan McIntyre: Yes, it’s interesting. At the start of the year, we were definitely debt heavy, and if you look at the picture now between the Pan-America warrant exercise and also the Karora transaction, we are actually almost net debt neutral now. We’ve got about USD$51M in cash and securities and USD$60M in debt that we will be paying off shortly.

Matthew Gordon: Ryan, good run through. Good to catch up with you. It has been 6-months. Things are motoring there. Well, 1) say hi to Dan for me, obviously well done dealing with COVID and avoiding COVID. But I’d be keen to hear from you guys soon, as things start to start to pan out for you and I am especially looking forward to 92 different revenues joining the 13 current producing assets over the next 2 to 3-years. But I appreciate your time. Pick up the phone if there’s anything interesting to say and we will speak to you soon.

Ryan McIntyre: Yes. Sounds good. Appreciate it.

Company Website: https://maverixmetals.com/

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Mark Selby #08 – Tesla, “Produce more Nickel. We will give you long-term contracts” (Transcript)

Canada Nickel Co Inc.
  • TSX-V: CNC
  • Shares Outstanding: 57M
  • Share price C$0.92 (02.07.2020)
  • Market Cap: C$52M

Our weekly Nickel Market Insights with Mark Selby, Nickel Market Commentator and CEO of Canada Nickel Company (TSX-V: CNC) will help you stay ahead. Stay up to date by listening to our weekly market roundup on Nickel.

So, what events have transpired in the exciting world of nickel this week? Price movements are at the top of the list: nickel has gone from a low of c. US$11,000/t up to US$13,430/t today. It did actually hit a peak of US$13,512/t last week, but Selby attributes this to nickel trading in synergy with some momentum drivers around the Shanghai Index.

Just as the nickel price was starting to recede, Elon Musk of Tesla, the figure of ultimate encouragement for nickel/battery metals investors, has told nickel miners to produce as more nickel in his quarterly call. He’s clearly gearing up to go big and kickstart the EV revolution in style. After launching the mid-tier Model 3, Musk needs this to be the cash cow for his company. Many have regarded Tesla stock as immensely overvalued given sales figures, but the c. $35,000 Model 3 could be a real gamechanger, building on the success of the Model S and Model X; I’ll hold off on the Cybertruck for now.

Major subsidisation packages in Europe alongside European vehicle manufacturers investing €250B in EV infrastructure, and the Chinese EV space needing to be rejuvenated are compelling reasons for nickel producers to be accelerating their production timeframes.

After touching on some of the macro thematics beneath the surface of the nickel space, such as the immense difficulties surrounding the production of the huge amount of nickel that may be needed in the next decade, we touch on one of our favourite gold production stories, Karora Resources (TSX: KRR). Selby is already an expert on the Dumont Nickel-Cobalt Project, having developed and de-risked it substantially during his tenure as CEO of RNC Minerals. Karora Resources has sold its remaining interest in Dumont (28%) to Waterton for some cash up-front and a residual payout based on a future sale. The 3 low-grade, bulk-tonnage, advanced nickel projects have all been acquired in the last 6 weeks. BHP, OZ Minerals and Waterton have all moved to secure projects early. Is this a major sign of things to come? Time to pile into nickel?

We Discuss:

  1. 2:42 – Tesla’s Quarterly Call: “Nickel Miners – Don’t Wait!”
  2. 8:54 – Innovations in the Space: How Can it Get Better?
  3. 14:51 – Environmental and Efficient: Impact on Investment
  4. 20:17 – Ways of Validating Company Claims for Retail Investors
  5. 24:09 – Giga Factories and Nickel Uses
  6. 26:45 – Nickel Price Drop: What Happened?
  7. 27:49 – M&A News: Karora Resources Sell Dumont Stak

CLICK HERE to watch the full interview.

Matthew Gordon: Mark, how are you doing, sir?

Mark Selby: Excellent, sir. Good to see you once again. Actually, I can see you better because I got my glasses back. They broke, and so I was with my readers which don’t quite work, but I can see clearly right now.

Matthew Gordon: I lose mine quite often and then my children tell me they are on my head. When you do that thing – and you go, ‘where are my glasses?’, I’ve reached that age.

Mark Selby: Mine fell off when I was cutting the lawn and then I drove over it with the lawn tractor.

Matthew Gordon: That would definitely do it. Well done, well, that’s quite spectacular. I’d better put them back on or I can’t see you or the page in front of me at the moment.

You are here for our weekly catch up on Nickel. And, we were both listening to the Tesla Quarterly call. I thought it was really interesting. I thought it was fascinating because it was quite insightful as to the way that Elon Musk and Tesla are thinking, and others will follow suit quite quickly.  the one big phrase that stood out for me was, ‘Please mine more Nickel. Don’t wait for the price to go up.’

Mark Selby: Yes.

Matthew Gordon: That’s more easily said than done. What was your take on the call?

Mark Selby: Oh no, it was fascinating. To me, firstly I would encourage people who are into Nickel to listen to those two minutes of it so that you can actually hear what the context was. For me, the fact that he was answering and came up to that response to the question of overall battery constraints; so, an investor was asking him, it sounds like you might be less concerned with battery constraints and he launched straight into: ‘Please mine more Nickel.’ And there were several dimensions to that. The key is A) don’t want for the price to move. B) if you can do it in an environmentally sensitive way. And C) if you can do it efficiently. So I thought those are the three key things that they are thinking about, and obviously they haven’t quite got there because he also talks on the call about how he doesn’t need any Cobalt but he has signed a couple of Cobalt deals but he hasn’t signed any Nickel deals at this point. That his comments really highlight some of the key constraints in this industry that we have started talking about on these calls. But he drove it home to what the exact theme is.

Matthew Gordon: Slightly conflicting messages about Cobalt. He is talking about Cobalt-free batteries, then he comes out and then he says, go and invest in some Cobalt. But let’s break it down on more of the stuff that we did understand, which was the phrase he says to Nickel miners, ‘Don’t wait.’ What did you read into that?

Mark Selby: Yes, what that fundamentally is reflecting is that at USDUSD$6/lbs today. There really is no project outside of Indonesia that could go ahead, assuming a long-term USD$6/lbs Nickel price, or at least for a period of time until the capital is paid back. For most projects, anywhere from USD$6.50 to USD$7.50/lbs is required. We are hoping that our project, given what we are seeing so far might be a little bit below that, but realistically, for the next set of projects to be developed, that is the price range that you need. , this is wishful thinking: the Nickel price isn’t quite there. The big miners before they are very confident or before the price is in that range before they are going to push a button on any expansions. So that is the issue there that he is really driving home.

Matthew Gordon: Someone like him who has got all the money in the world, they have no problem raising money. If you look at their market cap, it is frightening. There is nothing is impossible. But for miners, there’s a whole bunch of different constraints around that, price being one of them or the cost of money being the other. What do you do off the back of that? it’s nice to hear but it doesn’t change anything, does it?

Mark Selby: No, the key thing is it is always tough, even for someone who is a pretty bold innovator like Elon Musk, is you haven’t seen yet a car company invest directly into a mining company.  if you want Nickel at a price that is going to start at USD$6/lbs rather than higher, then he is going to have to think about that. It just takes corporations time to get around to think about what model might work for them. So, there have been models that have worked for Japanese trading companies in terms of how they invest in projects when other people are investing in joint venture in projects.  that the Tesla’s of this world need to think about how they do it.

To me, one model that makes a lot of sense is, Eric Sprott does a great job of advancing 50 different Gold projects simultaneously. He is not funding them 100% of the cost for each one of those, but he makes a 5% to 10% investment in a company which allows that company to probably raise double that. And once they have been Eric Sprott-endorsed, it makes it much easier for them to raise capital from the group of individuals and funds who follow along with Eric. He is able to put a little bit of his capital in, and all of the smart mining people are really good at using other people’s money to multiply the value on their money.

I’m pretty sure that Tesla is thinking about those types of models, and to me, that would be one way to do it. , you don’t need to pick a winner and you don’t have to bet USDUSD$100M, USDUSD$200M at this point. But even just endorsing two or three companies that could potentially get there. If you want that Nickel in 5 or 10-years, you are going to have to start doing something like that. And, a Tesla-endorsed company, whoever gets those first couple of investments will be well off to the races because all of a sudden there will be a slew of institutional and retail money come at that company to be able to advance that Nickel project.

Matthew Gordon: The way you are talking about that is you are encouraging Elon Musk to be more like Eric Sprott, and I am coming at from the point of view that shouldn’t we be encouraging people like Eric Sprott to be more like Elon Musk. How do you innovate in this space, not just Nickel. I have come from outside of the mining space originally and you see these innovators in different sectors solve problems which people who have been in there too long can’t. Do you think, is that coming through AI? How do we get better at doing what we are doing?

Mark Selby: AI on the exploration side is definitely going to open up a huge amount of doors, and you are already starting to see that.  we are just in the early stages. To my mind, we have gone through several exploration waves. If you look at, just as an example, the great VMS deposits that have been discovered globally, in the early 1900’s, you had the  walk-on ones, where a prospector was banging through the bush, saw some interesting-looking rock, banged it, caught an assay and was like, look; I found millions of tons of Copper and Zinc and Silver. And things like Sullivan, in Canada anyway, as examples there are the Sullivan Mine, the Hud Bay and so forth. And so, that was that generation. Then we had the second generation when geophysics started to be really well-used during the late 1950’s, early 1960’s, people stopped finding deposits at surface because they had walked everywhere where potentially you could find one, and then they found deposits like Kidd Creek, in Timmins New Brunswick, sitting not very deep below the surface, but below the surface so they had been missed at that time.

, we really haven’t had that next revolution of exploration discoveries, and I really do think that AI is going to be that, because  we have walked on pretty much everywhere we can go. We have seen the shallowest places where we most likely think about where things could be, and so now we need to use big data with some smart mines to understand where we could find deposits that we hadn’t found before. That’s on the exploration side. And Nickel, we don’t have a large project pipeline. That’s a critical issue in the Nickel space so there’s a significant amount of effort that’s needed on that point just to start of finding some new discoveries.

In terms of the rest of the sector, it really comes down to competition for capital. Mining has always done such a horrible job of destroying capital and not doing a very good job at actually returning much capital to shareholders. At some point, and what I’m excited about is having Tesla in that world to make that connection to the mining space is that if we are able to get some patient, private equity money into this space, then  that will allow more junior mining companies, more different stage mining companies make smarter decisions. Because, private equity; they invest in lots of high-risk businesses, , , things like pharma, high tech, it’s not like every investment you make is a home run, but once  that there is a funding pipeline behind you as opposed to, okay, the price popped today, investors are interested, I’m going to takes as much money as I can right now because I don’t know when the windows are going to open, it just creates a lot of really bad behaviour on both sides that  doesn’t help with the ultimate goal of creating value and returning capital to shareholders in the future. I hope that Elon’s discussions here will lead to more private equity start to look at mining because there is a massive amount of value to be unlocked here if it is done properly.

Matthew Gordon:  You said patient private equity, coming from a private equity world, it is definitely not a word I would put with private equity. And because of the impatient nature of private equity, it drove people to do better, because the demands were there for people to see make changes, make adjustments, tweak things on almost a daily basis to improve outcomes. And possibly this sector needs more of that, less staring at the share chart on a daily basis, but be outcome-focussed in terms of how the business and operations is done. And it might be beneficial. That’s why I am intrigued by curious minds like Elon Musk approaching the mining sector and putting a rocket under it, with the luxury of a lot of money behind it too.

Mark Selby: There is one venture: KoBold Metals, that has attracted a bunch of basic private equity money. And this is a venture that has basically said, we need more Nickel and Cobalt outside of high-risk areas and we are going to start to apply big data to solve that problem. That to me was quite encouraging. What was also encouraging was their first land-acquisition was next to a company that I am on the board of called Orford Mining,  the data has pointed to 6 or 7-years ago, but we need more of those types of ventures and we need more of those types of investors in this space if we are going to get all the Nickel that Elon says he needs in the next 5 to 10-years.

Matthew Gordon:  Well, let’s finish off on the Elon statement because it was, ‘Mine more Nickel,’ came with some conditions to it: it needs to be environmentally friendly and efficient, which I am reading as economic. What’s your take? Clearly ESG is a big part of this. Environmentally friendly or sensitive.

Mark Selby: Where that’s really coming from, and I hinted about this in the past and it is something I will be spending a lot more time talking about this, when you look at where most of the Nickel supply growth has come from in the last 5-years, it has been Nickel pig iron (NPI) from Indonesia. Before that it was Nickel pig iron in China and then looking forward over the next 5-years, literally, I don’t know the exact number but it will probably be more than 100% of the supply growth, because there are other supply operations that are still shrinking, it will come from Nickel pig iron and other projects in Indonesia.

The challenge with Nickel in a place like Indonesia is that processing laterite ore requires a huge amount of electricity, and in Indonesia, with the exception of PT and Inco who have built a series of hydro-electric dams in Sulawesi, it all comes from coal-fired power, and then you need to use some more coal to change the mineral into a metal. To make 1 ton of Nickel at one of these NPI projects, you are using 25t to 30t of coal, and when you multiply that by 2.8 it gives you 75t to 90t of CO2 per ton of Nickel. So even if you took 50kg of that and put it in a battery, I’m not sure Elon Musk would like 1t or 2t of CO2 strapped to his Tesla because he used some Nickel that came from that source.

The other projects that are being considered in Indonesia are looking at Hpal projects, and we have talked about Hpal from time to time. The problem with Hpal is you are taking about 1% of the material and you end up with about 99t of it, of tailings for every ton that you process. Piling up that type of waste in a highly seismic area, it is not necessarily, we have seen issues in certain areas when it is not done properly. A bunch of those operations are looking at deep-sea tailings. VW, BMW, Tesla, I don’t think are very happy knowing that the product that they might be purchasing is spewing 99t of tailings in an uncontained way into the sea to get the Nickel and Cobalt that they need. Tesla is stepping back and looking and saying, okay, in this industry, all of this growth is coming from these particular projects which have a pretty high environmental footprint attached them. So that’s where his environmentally sensitive parts are coming from. We have some nice inherited advantages in our project that we’ll be talking about a lot more in the coming weeks here.

Matthew Gordon: It’s not just Elon Musk that that is going to influence, but it’s the big funds. We have spoken to the Fidelity’s and the BlackRock’s of this world who are moving over to their ESG-led investing thesis which means that if there are Nickel Hpal projects and those sorts of numbers in terms of the carbon footprint and whatever they are spewing into the sea, that’s going to influence their ability to get financed when they go to the investment committee and say, ‘well, should we be investing in this Hpal project or a Sulphide project?’ You’re going to get 2 very different answers.

Mark Selby: Yes, I know. That’s where mining companies really need to… what worked in the last century, in the last millennium, isn’t going to work in this next one. You really need to think about how are we going to design and construct and operate our project in a way that’s going to have the lowest environmental footprint possible. Because mining, a big part of it is a capital intensive industry, and it’s about competing for… if you’re able to compete for capital, if you are more competitive and you’re able to get it at a lower price, that is going to have, in terms of Elon Musk’s other goal of having the most efficient and lowest cost type of metal to market, if you can do the thing that gives yourself the broadest investor base possible, then you’re going to be a winner. We are going to be talking about that at Canada Nickel, because we realised that we have to start mining for the new millennium and get away from the way we’ve been doing it in the past.

Matthew Gordon: This was sent in by a subscriber to Crux Investor: How can a retail investor best validate the claims of a company as it relates to their assets?

Mark Selby: Yes, that’s a challenge. A retail investor can’t go out and hire an engineering consulting firm to evaluate that an institution or a strategic investor could do. I would say there’s 2 things to do: 1) in Canada you get access to the full 43-101 report.  On the ASX, you get the press release that’s attached when they complete the report, but you can’t actually get the full report. But you do get a bunch of the information in the press release. Look at who did the work. We’ve talked about this on another call, but there’s basically, there’s 2 groups of engineers. There’s people who do studies that get hired by junior mining companies to come up with good numbers that someone can sign off on, but they’ve actually never built anything or haven’t built anything in 30-years. So put a big question mark around the quality of those estimates. And then there’s the engineering firms that, actually not just do studies, but actually build things and have built things within the past decade. So, in terms of the quality of the estimate, you’re going to get a much better estimate from those group of companies. If it’s a mining company that’s serious about actually advancing their project, they are not going to use, ‘Joe Engineering Co’ or ‘Jane Engineering Co’. They are going to go with the person who has the reputation that when they go to pitch the project to joint venture partners and other larger mining companies, those companies know they can rely on those numbers.

2) try and find projects that have been built within 5-years or 10-years. Try and find, if it is using Nickel for example, look at Ferro-Nickel projects that have been built in the last few years. Look at HPal projects that have been built in the first few years. And, it doesn’t take a lot of, and maybe this is something we can put together in the next few weeks; just some historical benchmarks that just, look at the capital cost; look at how many tons of ore are they going to process; how many tons of metal; where are they going to produce?; what’s the operating costs?; what’s the capital costs? You don’t need to go through 20 numbers, it’s just pulling those 7 or 8 numbers and looking at those 7 or 8 numbers for some historical projects and just to see, ‘okay, how in line are they?’ And if they’re significantly different and they haven’t explained why they are significantly better, then there is probably a good chance that they are actually not going to be significantly better. So, that’s what I do when I’m looking at other projects and I’ve done a corporate development role. That’s what I would encourage people to definitely go and do.

Matthew Gordon: If we could help maybe be put together the 7 or 8 numbers that people should be looking at. If you’re able to help out, that would be for Nickel, because different commodities have different types of ratios that you should be looking at.

Sticking with the Elon Musk thing if we may, just for a little bit longer, Elon talks about his Gigafactories. And we talked last week about the fact that currently Nickel is used mostly in stainless steel, that’s its biggest market. But going forward, the Gigafactories are going to be built. These factories, the numbers certainly seem to be getting bigger and bigger and bigger. Is there a number that people are attributing to as a percentage of the Nickel market where this Nickel is going? Is EV going to be 10% of market? 20% of the market?

Mark Selby: Glencore has put out a few numbers and they’ve probably got as much market presence as anybody and their forecasting a few years ago that we would need 1.3Mt by 2030, and that’s equal to about 60% of what Nickel supply was in 2018. So, and that’s on top of the Nickel growth that’s still not a huge amount that’s basically getting to 25% to 30% of the market going towards electric vehicles being sold on that basis. There are forecasts now that once you get to a certain tipping point, you’re going to see things accelerate much more quickly than people think. I wasn’t surprised to hear Elon Musk talk about constraints around, when the question about constraints came up, he immediately leapt to Nickel, because to even to produce that much Nickel by 2030, in addition to all the growth Nickel is required for stainless steel and all the other applications, in my mind it is going to be extremely challenging.

The other part that he did talk about on the call is that is that they very much see 2 strata. They have lithium iron phosphate, which is for the low end lower-end part of the market. And they then talk about their Nickel-based batteries for the upper end of the market. And that’s the way they are thinking about a lithium ion phosphate supply chain and the Nickel supply chain. Their battery technology day is coming up so the fact that they haven’t stopped talking about Nickel says that Nickel is going to be playing a pretty essential and long-term role as part of their battery platform.

Matthew Gordon: listen to that quarterly call they were talking about mega packs.  They’ve got big plans. And just in terms of time though, the Nickel price has fallen back a bit this week. Why?

Mark Selby: I was surprised that it moved higher and it was trading alongside some momentum drivers around the Shanghai index and then the Copper prices had moved and so had moved along with it. Both of those have come off and it came off until Elon talked last night, and Nickel is now back up USD$0.20, up over USD$6.10/lbs. He is the guy that can move markets. My question is do I fully believe in medium and long-term fundamentals, but I’m not sure that the near-term fundamentals support pricing above that. So we’ll see whether that Nickel price erodes back to USD$6 here over the next month or in a year or so from now, 6-months, a year from now, if he opens his mouth and the market is a lot tighter, then those are the kinds of things that all of a sudden you wake up and the price is up USD$0.50 to USD$1 in over week.  Hopefully we’ll see that sooner rather than later, but it’s not going to happen in the next few weeks.

Matthew Gordon: A little bit more M&A in the market.

Mark Selby: Yes. A project I’m extremely familiar with. Karora Resources, which was RNC minerals, sold the remaining interest in Dumont to Waterton for some cash up front and then some residual pay out based on a future sale. A big plus, a big thing there is you now have all of the 3 large-scale, advanced low-grade Nickel sulphide projects have all been acquired in the past 6-weeks. This is far faster than I thought they would. You’ve got BHP acquiring Honeyman Well Minerals. Oz minerals acquiring the 30% of Nevo Babel that they didn’t own by taking over Cassini resources. And now Waterton consolidating their ownership in RNC minerals. So now you’ve got the 3 large-scale Nickel sulphide assets owned by 3 very tight-fisted owners who will not part with them, or either will never sell them or will only part with them at a pretty high valuation. It’s helpful for the Canada Nickel story and then the other earlier stage Nickel sulphide developments out there.

Matthew Gordon: Discretion may be the better part of valour here, but the market seems unsure, unsure how to read that. It was effectively USD$10.7M cash, and up to USD$46M, depending on where Nickel goes going forward. Do you feel that’s a good to deal? Would you have been happy with that?

Mark Selby: Yes, I know you had 2 specific groups with very specific different sets of interests at this point. Karora is now very focused on Gold. And knowing the gold assets they have, we acquired Beta Hunt and Higginsville while I was there, and they were both spectacular assets. So the opportunity to get some more cash now to unlock even more value at those assets made a lot of sense, and they still retain some upside if and when the project gets sold. But you could easily contemplate a scenario where a transaction for Dumont doesn’t happen for 4 or 5-years because Waterton is going to wait for the absolute peak and then a cold market before they exit that position. In every deal, you have to make a few trade-offs. And that given where Karora Resources is that deal definitely made sense for them.

Matthew Gordon: Mark, thanks very much for that. Another week in the world of Nickel. What’s interesting to me is the amount of M&A that’s happening in this space now. It helps with Elon Musk saying what he said, but even before that, and despite that Nickel assets are being marked up here. And it’s just interesting to see where things go over the next 6-months or so, for sure.

Mark Selby: We said all along that there is only a handful of Nickel assets. It’s not like Gold where you’ve got literally hundreds of gold companies and new ones emerging at every stage. There’s a very short list of Nickel companies. Nickel hasn’t started to move yet, but you can that see one comment from Elon makes the Nickel price go up 3%. I would encourage investors to not wait too long, and then make sure you’re positioned because 3 assets have gone in the last 6 or 7-weeks here that I didn’t think we would see transacted on for at least another year or two.

Company Website: https://canadanickel.com/

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Mark Selby #09 – Tesla Calls for NetZero Nickel and Efficient Nickel (Transcript)

Canada Nickel Co Inc.
  • TSX-V: CNC
  • Shares Outstanding: 57M
  • Share price C$0.92 (02.07.2020)
  • Market Cap: C$52M

Our weekly Nickel Market Insights with Mark Selby, Nickel Market Commentator and CEO of Canada Nickel Company (TSX-V: CNC) will help you stay ahead. Stay up to date by listening to our weekly market roundup on Nickel.

Elon Musk impact still ripping through the nickel market:

  • nickel at $6.25
  • up 5% since his comment
  • no change fundamentally
  • with gold at all-time highs, if you bought CS, TKO, or a range of other liquid high torque copper stocks, you have outperformed most gold companies.
  • Still not clear support for higher prices at current time
  • nothing clear on inventories, supply/demand fundamentals

The Positives

  • Chinese reflation still ongoing
  • ore imports for June 2020 dropped year over year (YoY) as the Philippines couldn’t make up for Indonesia. And ore stockpiles only growing slowly. Need multi-million tonne build to make up for Philippines wet season in winter when ore imports drop off.
  • Stainless imports up very substantially YoY. If more than enough NPI, why bother boosting imports

Key Discussion Points

  • Leading analyst published view that Indonesia has all nickel covered until 2025 – if so, why is Elon Musk & Tesla talking about nickel as primary constraint and why he asked us not to wait for higher prices.
  • Nickel sulphate premium doesn’t exist – trading at a discount, no sustainable premium over long-term
  • Class I versus Class II – despite getting huge amount of air time from many – agree not an issue, will flow from ore source to end product.
  • Amount of nickel coming from Indonesia – nearly 900ktpa more by 2025 versus 2018. But where will the next 1.6Mt that is necessary come from by 2030.
  • Nickel demand forecast – needs to be 4-5% peak-to-peak + EV demand (less loss of demand in aerospace and oil & gas)
  • Without any clear forecast from consumers it is hard for analysts to have aggressive forecast

If automakers want lots of nickel by 2025 and 2030, they need to provide the information that will allow the industry to gear up to produce it. Realise their own estimates are proprietary, but they need to provide ranges. If they don’t, investment community won’t figure out, and they’ll pay way more than they should to get it – is better for all of us, if no surprises

  • Offsetting supply – will see high carbon, non-Chinese ferro-nickel producers get squeezed so will offset rest of nickel supply growth from Indonesia
  • Western automakers will not use high carbon, high footprint nickel in their cars. They will not rely on Indonesia/China as primary source

We Discuss:

  1. 2:53 – Elon Musk’s Statements: Impact and Implications
  2. 6:32 – China and the Philippines: Complex Relationship
  3. 9:21 – “Nickel’s Covered ’til 2025”: Misinformed Predictions
  4. 16:52 – Ethical Mining: Class 1 & 2 Debate, Footprints of Mining
  5. 24:15 – Clean vs Sufficient: Repercussions, Supply & Demand
  6. 29:52 – Market Moods: What’s Next for Price?
  7. 31:01 – Any Calls Regarding NetZero?

CLICK HERE to watch the full interview.

Matthew Gordon: Mark Selby. How are you?

Mark Selby: I’m excellent, sir.

Matthew Gordon: Good to hear.

Mark Selby: It is 7-days post-EM in the Nickel world, after Elon Musk’s big announcement last week.

Matthew Gordon: And Nickel companies and CEOs around the world are dancing a jig of joy for sure. We are going to talk about that as part of our weekly Nickel catch up today. There’s a lot we discussed last week; quite controversial topics. A lot of feedback, a lot of trolling, a lot of clapping, but a lot of discussion, which is the main thing for people to  maybe investigate a little bit more. I’m sure we will, over the coming weeks as well, drill down on a few of those things. Well done for that. We are going to continue with a bit of EM. The Elon Musk statement of last week still ripples through the market. Price – yet again up.

Mark Selby: Once again, wrong. The Nickel price has basically moved 5% off the back of Elon Musk’s comment. I know he said miners make more Nickel now, but I don’t think he was thinking about needing to buy more next week. But, it’s just with sentiment, fundamental, technical momentum – that definitely falls into the momentum category. I’d love to say the fundamentals are supporting that move higher, but not really seeing too much in a way that would cause that price level at this point to be sustained. Unless there’s more momentum comments come out, then we’ll see it drift a little bit lower back towards that USD$6 amount.

The one thing that is underlined is Philippines ore imports were decent, but what we need to see between now and next October is a steady rise in our inventories in China because ore imports go away every winter when Philippines hits the rainy season. If there isn’t a bunch more ore on the ground, then producers may struggle for finding supply. And the corollary to that is, there’s one of the analysts picking up on the fact that China’s stainless-steel imports have been up year over year to some extent. So, whether that’s a little hedging by a few people, we’ll see. But no broad basis support that says the prices should move much higher, in the near term anyways.

Matthew Gordon: Everyone needs an Elon in their life. It probably helps, but it’s not sustainable because the fundamentals and technicals don’t back it up. But it’s nice to have that sentiment now. And it’s also nice to get the attention because Gold and Silver have been taking all of the attention. Nickel has had a few days in the sun for sure. Some people have done quite well off the back of it.

Mark Selby: Yes, our stock has moved up nearly 2X since the call, which has been tremendous. And more broadly, you hit on a good point: if you are a Gold or Silver mining CEO these days there is huge amounts of capital now flowing into that sector, and flowing down the hierarchy of companies, and they are now getting to early stage exploration. In Copper, that’s now started to happen since our call back in mid-May. You have seen the high torque; Copper stocks have actually outperformed most of the Gold stocks that people have been pretty fired up about it. That’s why it’s important to get around those turning points, get yourself positioned.

But you have seen Copper stocks move and you’ve seen some Copper trickle down a level or two. They haven’t gotten widely down to the exploration stage, but that is happening in Copper. Nickel in Australia – Centaurus and some others have raised a decent amount of money. But in North America, the TSX-type Nickel stocks, and the rest of the base metals still really haven’t participated in seeing any material capital at this point. Having this Elon Musk comment now fixate, helps get investors focused on the opportunity in Nickel.

Matthew Gordon: Let’s go back over some of the ground we’ve covered in the past few weeks as well, if we may, because China is reflating. Indonesia has shut up shop. And we’re relying on the Philippines to make up the difference. What are you seeing happening there? Is Philippines going to be able to make up the difference?

Mark Selby: Yes, on the demand side the reflation trade continues to be very well supported. All of the data that I had talked about previously, they’re all still heading in the right direction. In terms of a broader commodity reflation, compliments of China, that’s definitely coming down the path, and you can see it particularly in the Copper price, which is holding up towards USD$3/lbs.

Yes, Philippines is the key here for supply is how much ore is going to come out of the Philippines. There is an announcement that there was a bunch of mines that were shut down in 2017. The Philippines’ government is relaxing some of the restrictions on there. In 2017, it seemed like a sizable amount of ore relative to how far the market continues to grow and the big gap that needs to be filled by Indonesia, it’ll be a little bit more ore, Philippines’ ore is lower grade than Indonesian. But, it’s not going to come anywhere close to filling the gap that has been created by Indonesia. It is Indonesian NPI growth versus Philippine ore growth, versus Chinese demand – that’s the triangle that’s really going to determine where prices head over the next 12-months.

Matthew Gordon: Philippines …do they have seasonal outputs? Because, obviously it is quite wet over there. Is that an impact factor we need to consider?

Mark Selby: Oh, most definitely; the rainy seasons in Indonesia and the Philippines used to offset each other to some extent, so that China had a relatively stable supply of material all year round. But with Indonesia out of the picture you’re going to have this November, December, Jan, Feb period where Philippines ore exports plunge. There’s still one part of the country that’s dry so they still produce ore from that part of the region, but from the rest of the area you see a massive drop off in order supplies. And, ore inventories need to increase. So that’s not necessarily a bad thing. That’s what the market will need to increase by several million tons between now and the start of October, if China is going to have enough ore to really see it through that that downturn in the Philippine season.

And, sometimes rainy seasons are shorter than the normal. We will have to see what happens at that point in time.

Matthew Gordon: Question for you: there is quite a good newsletter writer in the marketplace, no names, but one of the better ones. He seems to say that Indonesia has got this covered, Nickel is covered until 2025. Everything is A-OK. Do you agree?

Mark Selby: I agree with some of his underlying comments, but I don’t think I necessarily agree with the conclusion. He was writing in response to Elon, and Elon said, we need more Nickel now. He expressed concerns with environmentally friendly, environmental sensitive and huge volumes, and you’ll get a big contract.  This analyst’s comment looks back; we see pretty strong supply growth out of Indonesia, which I do not disagree with the numbers that he was talking about. They are exactly in line with the forecasts that are there. There’s a question mark around whether the pressure acid leach production will show up. And I share that same question mark. It was supposed to already be in production by now, and a bunch of the projects have already been delayed by several years. So we’ll see whether they get there.

That pressure acid leach has been troublesome for everybody around the world. If they don’t have any trouble that will actually be a surprise. But yes, they’ve got a pretty big increase in supply growth, but the fundamental issue is he has better and more aggressive demand forecast than a lot of analysts. But as I’ve said before, a lot of analysts have a tough time putting a number that’s too far from  2%  trend demand growth, because they never want to be ‘too wrong’. And the trouble with a metal like Nickel is it’s a very high growth. It grows at 5% versus 2%. And then because it’s very volatile, not only does it grow on average 5%, but there are years where it grows 8% to 10%. There are years it grows 0% to -2%, which obviously we’ve been going through right now. But when it rebounds, it has always rebounded with pretty sizeable year over year growth. And so on a peak to peak basis, you end up with this 4% to 5% trend demand growth. And this is, to the Elon’s and to all the other EV supply chain people, the auto people, because, there’s been concerns expressed about Nickel and Cobalt and other metals from time to time. If you want material from the mining companies, please provide some clarity in what your medium and long-term outlooks really are.

I have had discussions where a number of these companies, and they have some pretty spectacular demand forecast going forward, which are much higher than a lot of analysts have in terms of how quickly and how much metal they’re going to need. And so if you don’t provide that to the market and then the analysts will use that into their demand forecast, you’re not going to get the metal you need, because the analysts aren’t going to have the demand growth that’s there, and they’re going to say, ‘Oh, we’re going to be balanced or surplus for many, many years.’ 

This is a call out – if there’s anybody listening on this, ‘yes, please provide more long-term clarity’. It doesn’t have to be your individual forecast. Just talk about it as an industry. So you’re not giving away any industrial secrets, but please provide some clarity in terms of 2025 and 2030, what your range of production is going to be and then the mining industry will have a chance of actually delivering that metal for you.

Matthew Gordon: That is smart. I can see why you’re also CEO of a Nickel company. I can see why not just Nickel, but Cobalt, Lithium, and all the other parts that go into this EV thematic that we have been talking about, all talking about. We would be more easily able to raise money off the back of that. Right now, you’ve got long lead times. The industry is having difficulty raising capital to get into advancing projects. You’re feeling, from what I’m hearing is analysts don’t have the data to be able to make informed or do informed report writing. And as a consequence, bankers aren’t able to use that information to be able to say, ‘well, yes, this is a sensible use of our capital’. What’s the likelihood of an automotive CEO revealing what they’re going to need in the short to medium term?

Mark Selby: There is no chance that they’re going to reveal their individual forecasts. But if they can talk about their view collectively in terms of at least some range of where electric vehicle demand is headed. And, it would be very, very helpful on that front for sure.

Matthew Gordon: Let’s come back to some numbers then if we may, because we were talking about Indonesia. We went over to talk to the automotive manufacturers. Coming back to Indonesia, what is coming out of Indonesia at the moment? Because this analyst that we were talking about, referring to, talked about 2025, but what is happening in 2030 for instance?

Mark Selby: The update was really focused on out that next five years. So you’ve got production growing by 800,000t or 900,000t, which is in line there. It’s going to be offset by a 200,000t or 300,000t reduction in production from Nickel pig iron in China, because they don’t have the ore. That ore is being processed in Indonesia rather than being shipped to China. And beyond that everybody, including him…it’s an open question in terms of, ‘okay, if EV demand comes in close to where it’s going to be, we won’t have enough’, and we’ll have to look at, and Lithium iron phosphate is going to be a big part of the market. It has to be. There’s a market niche that makes sense for that. Elon Musk talked about that there’s really 2 streams: there’s a Lithium iron phosphate stream and a Nickel Cobalt stream that will continue to advance in terms of the capabilities of that battery to deliver range.

The other analysts who do cover it make those long-range forecasts, they have very low demand forecasts for stainless steel which are much lower than trend. Those analysts don’t necessarily have the overall demand growth that not only doesn’t approach the 4% to 5%, including EVs, it even falls short of that 4% to 5% trend demand growth, which is very frustrating from my perspective.

Matthew Gordon: Let’s talk about ethical mining. A very big topic.  It’s getting bigger. Last week, you introduced this concept of NetZero. It’s something you are trademarking, and you have also registered as a corporation. I want to talk around, not just that, but things like class 1, class 2. Should people now be paying more attention to things like class 1, class 2? Because it has been a debate, we discussed it a few weeks ago. Can you just remind people what the debate is?

Mark Selby: So the class 1, class 2 is something that came up about 2 to 3-years ago. There are only certain types of Nickel that can be used in batteries. If it doesn’t come from this source or through this refinery, then it ultimately can’t be used to make batteries. This analyst report that I’m referring to is very, very well written. And, there’s a lot of things that we agree on entirely. One is around this class 1, class 2 thing; it is not 100% wrong. There’s sulphide ore, there’s laterite, limonite ore, there’s laterite saprolite ore and there are paths with the right Cobalt price and Nickel price and product price that each of those sources can end up in any one use. And the Chinese will make sure that there’s more than enough processing capacity, as they’ve done in every other material, to transform whatever feed source they can into whatever end use source is required by the market. So do not get caught up in those class 1, class 2 differentials.

The other thing as well that it gets a lot of is the ‘Nickel sulphate premium’, and  3-years ago, when all of a sudden you had a new source of Nickel sulphate supply, and Nickel sulphate is a very small portion of the Nickel market, but you had this big new source from EVs. You had a short term bump where premiums went well up over USD$2,000t. And all of a sudden it became, ‘oh, there’s this massive sulphate premium that will exist now and forever’. The reality is Cobalt sulphate trades at a discount to Nickel metal. And, those are produced from often similar feedstocks. So, that’s where Cobalt has gotten to, and that’s where Nickel is headed.

So, you won’t see a sustainable premium, there will always be a little bit of one, because there’s some additional transformation costs to do it from a pure product into an end use product. But by and large, it should be zero, or just either side of zero on any longer run average here going forward.

Matthew Gordon: That leads us on to things like the supply chain, because before Nickel gets to do its thing, before Nickel producers get to do their thing, iron ore is involved. We need to get iron ore out of the ground. And part of discussion last week was around the footprint of doing that. So, explain to people how this is all connected. What does that chain look like before it gets to Nickel?

Mark Selby: The key piece here, what we’re really trying to focus on with our NetZero initiative, is car companies who are building EVs, they’re trying to solve a problem, which is carbon emissions for the planet. And so what they don’t want to do is build a product that in the course of building that product and taking all the various components together, end up creating a big footprint that’s going to take you six years to drive around the car, drive that little EV around and not buy enough gasoline that you actually offset that footprint. They wanted to build as low a footprint operation as possible. And the thing that this industry really needs to realise is there is an entire generation of consumers that sees and looks at Co2 emissions the same way that we used to look at movies of industry in the seventies; with great orange coloured liquid running out the back of a plant down into a stream and down into a lake. And rivers used to catch on fire because there was so much pollution in there. That’s what a new generation sees with Co2 emissions; as horrific as that seemed to us there’s an increasing number of people who look at Co2 emissions with that same horror. We really do need find ways to produce a zero-carbon product. And we’re in a fortunate position with our deposit and where it’s located in Timmins that we can take a bunch of existing technology and make that happen.

But the same discussions really need to start happening because if you really want to take that one step further, when you look at the large mining companies, the bulk of their revenue comes from iron ore, thermal coal and that coal. And almost, you are starting to think about that as the cigarette producers of industry, because cigarette producers, it’s like, ‘oh, okay, well we just make them, if people choose to smoke them, they’re just exercising the right to smoke them. And if that kills them and puts massive costs incurred to the health system, those are all people just choosing to do that’. All of his iron ore and coal, a huge portion of it goes to China where it gets converted into steel using traditional processes and creates a massive amount of Co2 emissions. Our industry needs to ‘own its shit’ in terms of, we have to think about really how it’s used and start deploying capital and start thinking about our projects, not just to get to this intermediate point, but how do we deliver to industry a cleaner, greener product that the market really needs.

And just coming back to Nickel for a second in Indonesia, the bulk of that is more than 100% of the growth that’s coming in terms of supply. I do not think, and it will displace some of the Nickel that’s currently being used that could be at that much lower footprint than the 90T of CO2 for every ton of Nickel gets produced in Indonesia. But, there’s a lot of other sources of Nickel that either have a bunch of Co2, a bunch of So2, or a bunch of deep-sea tailings associated with them. When Elon’s talking about and making a point that Nickel is his constraint, it is because they’re struggling to find environmentally clean Nickel that they’re quite happy to put in the bottom of the Tesla. So, some more information from that industry to help inform investors in terms of what the opportunity is, would go a very long way to help them get the Nickel that they want.

Matthew Gordon: If the Teslas of this world, the BlackRocks of this world, the fidelities of this world are striving to find, in this case, clean Nickel, it could be any commodity, to be socially responsible in every way, across the entire length of the food chain – that’s great. And whatever some people would call them: ‘snowflake millennials’, they want this, but at the end of the day, if there’s not enough Nickel, we’re going to have to come back to producing Nickel the old fashioned way, and as dirty and as polluting as that may be, it is needs must. So what are you suggesting? A bifurcated market in terms of pricing here? What happens?

Mark Selby: Yes, to the extent that there will be insufficient supply of clean, green products, the demand for that will exceed that. There are often times where people would like something but they’re really not willing to pay up for it. We’ll see.  We don’t need them to pay extra. Our whole approach with Crawford and Canada Nickel and NetZero really shouldn’t cost us anything extra because of the local advantages that we have. But, if prices don’t get to a point that they incentivise enough clean, green production, then premiums will have to emerge to make that happen. If you are in the chain, then you want to make sure you get that those clean, green sources of supply sooner rather than later. So that you get access to it without having to pay the full premium for it.

Matthew Gordon: Then what are the options available? And do these companies buy carbon credits if they’re producing, we’ll call it dirty Nickel – the old-fashioned way. Do they get taxed more by governments or does industry somehow pay for it? What are the options available here? What do you see this new world looking like? Because I do get that the Tesla will demand it, millennials will demand it and more funds will demand it. But at the end of the day, when the rubber hits the road, if they’re running out of Nickel, they could care less, right?

Mark Selby: No agreed. But the carbon pricing mechanisms, you’re seeing more and more jurisdictions really starting to talk about pricing carbon. And so, when that happens and that really gets factored into the costs, the reason they’re doing that in Indonesia is that’s the cheaper way to produce the material. If that starts to somehow, as it’s making its way out of Indonesia and into the market, and somewhere along, whatever carbon is embedded in the product has to be taxed or penalised, then that will start to change behaviours. And, market mechanisms are generally always the best way to make adjustments rather than individual regulation.

The tricky part is, China’s a huge market, for anybody who thinks that China’s still depends on the rest of the world for exports – no. It’s a massive, massive internal market. And part of the reason they have been flexing their strength politically is because they can really much more afford to do that than they could, say 5-years, 10-years ago or 20-years ago. The thing might be that some of the bifurcation that might happen is just more…Chinese industry is okay for the time being, with that  carbon footprint, and the rest of the world might not be right. That might be one of the key dividing points in terms of the Chinese EV companies aren’t going to get to sell their cars outside China because they won’t be allowed or there won’t be a market for it, or they’ll be taxed so heavily that that will price them out of the market effectively.

Matthew Gordon: Well, in the current environment of trade wars and tariffs going on, it is probably very topical to discuss, maybe something we can pick up on another time. But are there any examples where bifurcated markets have actually worked?

Mark Selby: That’s a good question – maybe, what, I’ll think about that over the coming week and see what I can come back with, because anytime any  bifurcation opens up is that you then end up with, the gap for that product tends to get closed over time.

Matthew Gordon: The general mood at the moment is obviously very positive with regards to Nickel. You are going to take a slightly more sanguine approach to this?  What do you think is going to happen now? Is this the week it’s going to come back down?

Mark Selby: Oh, no, it won’t come back down this week. You will just see through the remainder of the summer and through till September that I’ve been saying range bound for a while and I haven’t been right. But, the near-term fundamentals just aren’t there in terms of really moving things higher. Where things will get interesting is, when we get to October we’ll have to see what ore inventories are like in China and how quickly and how aggressively does the Philippine rainy season come into hold. And do we see stainless steel production and consumption push higher in China post-COVID. So range-bound for now, and then let’s check in, in September and October. Range bound with the risk to the upside, rather than to the downside.

Matthew Gordon: Any inbound phone calls off the back of NetZero from auto manufacturers?

Mark Selby: I didn’t have any additional calls, but I’ve had relationships with a number of the EV suppliers who would be looking for a product at some point in time. Part of why we’re creating NetZero metals is to be able to a lot of the supply chain is quite happy to have access to long-term offtake for Nickel and Cobalt. They are also very keen to put processing plants between your mine and the auto plant and be as close to that as possible. Because the one thing I will emphasise, and drive home across the industry is, all the players that I’ve talked to, the cheapest, best way to make this product is dissolve it. Get it into the system, dissolve at once and keep it into an end product that then goes to an auto industry.

Making sulphate out of Nickel that’s in solution takes a lot of energy to crystallize it all. And then the first step that happens when you take it to another plant is that gets dissolved. So, it doesn’t exist now, but what you are going to see, and I know what’s coming because that’s the way that a lot of the key players in your industry are thinking is, they want to build these plants with intermediates coming in one end. They will do more of the Nickel upgrading and produce a final battery product or battery precursor within one single facility going forward. Having a net zero metal subsidiary, which is separate from the mining operation really helps in those types of discussions, in terms of being able to bring them in to joint venture.

Matthew Gordon: We will catch you next week. I’m sure there will be more to talk about, but it seems to be a new thematic in the market now. You and a few other players have approached us and to talk about perhaps the new way of processing Nickel. I’m intrigued to see if the industry as a whole reacts to what has been talked about in the last couple of weeks. Obviously, it got a little kick up the backside from Elon Musk, and also a positively in terms of the share price, et cetera, but also in terms of maybe a new greener, more efficient way of producing Nickel. And then those are the 2 bits that, more Nickel is great, but greener and more efficient; the industry is going to have to wake up to that demand.

Mark Selby: Yes. My call to the auto industry and the EV industry is share more data. Let analysts make better forecasts. Then you have got a better chance of getting your Nickel.

Company Website: https://canadanickel.com/

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Brandon Munro #18 – 3 Reasons Why Cameco Restarts Uranium Production Now (Transcript)

Bannerman Resources Ltd.
  • ASX: BMN
  • Shares Outstanding: 1.06B
  • Share price A$0.035 (16.07.2020)
  • Market Cap: A$37.06M

Uranium Market Commentator & Bannerman Resources (ASX: BMN)

CEO, Brandon Munro, calls in for our weekly catch up about the world of Uranium and Uranium investing.

Cameco’s quarterly call stuns market with some of its decisions. Have they lost the opportunity to drive the spot price up? We discuss the implications for investors and also for uranium juniors. We now wait for the KazAtomProm quarterly on 3rd August. We focus on the restart of Cigar Lake and reasons why they may have made those decisions and how it may affect partnerships elsewhere.

We Discuss:

  1. 2:53 – Opinions on Cameco’s Announcement
  2. 8:22 – Market Reaction: Implications on Utilities
  3. 9:57 – Reasons for Reopening Cigar Lake
  4. 13:23 – Buying at Spot Price: What’s Going On?
  5. 16:29 – Conversion Market Transition
  6. 18:06 – Final Thoughts

CLICK HERE to watch the full interview.

Matthew Gordon: Brandon Munro. How are you, sir?

Brandon Munro: I’m really well. Thanks, Matt. What about yourself?

Matthew Gordon: Good week, . A lot of new things happening here. So, we are rearranging the deck chairs a little bit. A few new people on board, so it’s all good. Looking forward to the weekend actually; a bit of good weather, barbecue, a bit of wine. It would be good to get the nice stuff out. That’s the plan.

Brandon Munro: You deserve it. You’ve been doing so much with your business, and just the responses and the comments that you’re getting are epic.  you can reach high on the shelf with this one for your barbecue.

Matthew Gordon: Very high, very high, Brandon.

Brandon Munro: And do you need to get that in writing from your wife, for permission?

Matthew Gordon: If you’re insinuating that I don’t wear the trousers around this house, you would be perfectly correct. Instead, let’s talk about what has happened in the world of Uranium this week. So, big thing of this week was the Cameco quarterly call – a lot discussed, but there was one topic at the top of everyone’s minds, and  the prices that we saw in the market afterwards would tell us that people had a strong view as to what the impact of that might be. I’m talking clearly about the restart of Cigar Lake. What was your take on that?

Brandon Munro First of all, for anyone who missed the call, Cameco have announced that they plan to restart mining at Cigar Lake. They believe they can initiate that fairly quickly. All of their staff are still on full pay so getting them back is really just a case of logistics and managing it all safely. They started that at the beginning of September. They would expect to be in production by mid-September for example, after doing a little bit of maintenance work after that period that it has been off. The market didn’t seem to like it very much. On the one hand that’s not surprising because the average Uranium punter would have preferred to see Cigar Lake off for a lot longer and a lot more pounds suppressed or sequestered from the market.  we just need to remember something: they initially announced that Cigar Lake would be temporarily suspended for four weeks and it’s going to be down for the best part of 6-months. It’s more than a Uranium investor could possibly ever have wished for at the beginning of the year. Some of the commentary being unduly critical of Cameco is just misplaced.

Matthew Gordon: There is frustration there, because this was seen by many as an opportunity to actually drive this price discovery in the marketplace.  it is born out of frustration, not necessarily anger at the management team, but just the perceived missed opportunity.  there’s a little bit of that. And they, as we saw a lot of red in the market yesterday with prices even Cameco was down as much as 17% yesterday. But it is a short-term reaction, possibly quite a good buying opportunity. But what else were they able to say about this restart? Because, it’s not just about restarting in September, it’s the rate at which they are able to do so – any thoughts on that?

Brandon Munro: The first thing is, they didn’t portray this as an absolute certainty. It’s a plan. It’s what they would like to do. It’s what they’re working towards doing, but it is still subject to it being safe to do so. And Tim Gitzell really emphasised that the safety of the employees, their families, the communities, and the country at large comes first. Interestingly, it’s also subject to some consultation with the community leaders in Northern Saskatchewan, and ordinarily you’d think, well, gee, that’s a bit of a lottery, what’s going to happen there? But Cameco is very measured with this type of thing and they’re quite conservative, so I don’t believe that you can jump to any great conclusions or expectations that that’s going to be a blocker. Unless Cameco felt very solid in their relationship with those parties and how they think they would react

I don’t really see that being a likely cause of a delay. Now in terms of how they’ll bring it back on, this is an underground mine. It’s quite conventional in general terms; it’s highly robotic, et cetera, et cetera, but it’s still an underground mine that is designed to be operated at full tilt. And full tilt, from their numbers, is exactly how they plan to do it. When you take their numbers and do a little bit of calculation, they’re looking to generate 5.6Mlbs between when they turn it back on and the end of the year. So that is running it at full steam. Probably working a little bit of stockpiles through to get a bit of a hit at the beginning as well.

The final thing that I’d say about it, that was quite interesting is Tim Gitzell flagged that there was a good chance it could impact 2021 production from Cigar Lake, and he pointed to defer development decisions. We can’t just assume that it’s going to be up to its 18Mlbs capacity next year. There’s a good chance that both in Kazakhstan, but also with this enormous Uranium mine in Canada, that we’ll see some a hangover into 2021 from this production disruption, assuming that they do manage to get it all started and operating effectively this year.

Matthew Gordon: Great point. I want to come back to what people infer from this, investors, retail investors infer from this. People selling off yesterday, they thought that there’s an opportunity for Cameco to sweep up any loose pounds in the marketplace. Likewise, with KazAtomProm, and that would give them the price discovery, which would then lead to hopefully some gains on the stock markets for them. So that was the big hope that even if they go full tilt from September, they’re not playing catch up on the lost pounds this year. But what do you think is going to be the reaction in the marketplace as far as utility buyers are concerned? Does this give utility buyers a bit more breathing room, or they don’t care? They are still focused on their own problems elsewhere.

Brandon Munro: It’s more of the latter. I don’t think you’ll see this significantly change the behaviour of utility buyers one way or another. Interestingly, one thing that it might well do is give utility buyers that little bit more incentive to be talking to Cameco. They now know that if they are contracting with Cameco, it’s coming from produced pounds, not purchased pounds, and there might be a little bit of that that came into Cameco’s thinking with the timing and the decision to restart. But as we’ve discussed a few times, the utilities are not in the discretionary mode where they’re waking up and deciding what do I choose to focus on today? They are fighting bush fires at the moment and this won’t really make a big difference to that. If anything, it’ll just give them that little bit more confidence that they know what’s going on. And that they don’t have too many moving parts in this whole equation at the moment.

Matthew Gordon: Let’s look at Cameco’s reasons for restarting now. Why do you think they made this announcement now?

Brandon Munro: They’re motivated by a few things.

The first one is, and we discussed this many times over the last few months, when you were posing some of the thoughts from the punters out there that Cameco would be making this move to try and force prices. I believe that Cameco makes their decisions for the right reasons. And I believe that this decision has been made by Cameco, primarily in the interests of the community, its employees, the country at large was pointed to. And you can take that on face value with Cameco – they are just that company.

The second reason is clearly financial. It’s costing them USD$8M to USD$10M a month in care & maintenance. They still have all of their employees on full pay, waiting to return to work. They haven’t been able to mitigate the expenses of this very well. And when you’ve got a plant and a mine like this that’s ready to spring back into action you need to keep everything oiled and looking shiny and that is an expensive process. They also pointed to the fact that they are buying now in the spot market well above the cost that they can produce. There’s a margin game to be had by introducing produced pounds rather than continuing to buy.

And the third reason, and I don’t have anything to go on here except perhaps a little bit of instinct, but I just wonder if they have got deep concerns about the reliability of production out of Kazakhstan? If you put yourself in Cameco’s situation, or imagine sitting on the board of Cameco right now from a governance point of view, and you would be asking the CEO, can you guarantee that by the end of this year, we will have primary produced pounds to sell in to our customer contracts, or is there a chance we will be entirely exposed to the market?

And number 1. it’s a joint venture, Inkai, so they are not the operator.

Number 2. it’s a long way away in Kazakhstan.

And number 3. as we’ve been talking about, things are not too rosy in Kazakhstan with its management of COVID.

I would expect part of their decision making may be, we need to have control of primary produced pounds as a fundamental risk management lever given that we are the second biggest player in this market and given that we’ve got such a large volume of pounds under contract. It’s those things. And when you start to think through those 3 different factors, I don’t think you can blame them for making a decision to not hold off pounds and try and force a little bit more inventory out of the market, et cetera, et cetera. It seems fairly clear to me that their decision-making is sound.

Matthew Gordon: I would agree with you about doing the right thing. I hadn’t appreciated the scale of the losses on a monthly basis. They have obviously done their numbers. They have worked out the arbitrage in producing, not producing, buying in the market, producing their own, etc, versus what they price may do going forward. Because they have done a few things which may inform that, such as the spot buying. The spot buying that they have done in Q1 v Q2. Maybe you want to elaborate on what’s been going on?

Brandon Munro: When you look at the numbers, they purchased roughly 4.5Mlbs in the first quarter in the spot market. And then with the disruption, they obviously realised that they needed to do some fairly serious risk mitigation and also chase some of the cheaper pounds before it started to form a new base or a new floor. In this quarter, it’s been effectively tripled: 14.5Mlbs or thereabouts. They have really got after it in the last quarter in the spot market and flagged that they will continue buying throughout the year, and if need be, they’ll start buying for 2021 deliveries as well. They’re indicating that they are prepared to use this big balance sheet they have got to build inventories if necessary. And I would expect the necessary means that production doesn’t return this year.

Matthew Gordon: Do you think that had any effect on the price gains on the spot market that we saw in early Q2/20, and was it enough to move the dial? And if so, what type of buying were they doing that it didn’t affect pricing in Q3/20?

Brandon Munro: That’s a good question, because we have talked about the plateau. And in fact, that was one of the analyst questions that was posed to Grant Isaac, what’s going on with this plateau? And it seems like there’s lots of people talking about it from his reaction. The buying that Cameco would have done initially would have been measured and careful, even though we saw a big spot price lurch, they would have been mitigating their own risks enough that they wouldn’t have wanted to sponsor that in any way, or to try and exacerbate that spot price lurch. There was a lot of volume done early, so that was early steps taken, and I’m sure Cameco was a large part of that. And the other thing is that there were many references made by Grant and even one by Tim, which was along the lines of, we felt very lucky to have accessed those pounds. When they were talking about buying pounds, either in the spot market or directly from other players, they reiterated that they were surprised at the pounds were available, that they were very fortunate to have been able to get those pounds and so on. And they’re not the type of company that that tries to gild the lily here or gold plate things.  what they’re trying to say is they didn’t expect those pounds to be so easily available and they’re pleased that they are, but they’re not sure that those pounds are going to be particularly available going forward.

Matthew Gordon: That’s informing the decision as to when they get back into production. They also talked about the conversion market transition, not saving the day, but certainly helping a lot. Is that something we can look to see more of going forward?

Brandon Munro: That division has certainly been profitable for them, which has helped them a lot to weather some of this and given them a lot more financial stability. Conversion is a complex topic, as we have talked about before, and they talked a lot about the arbitrage between Cameco-delivered pounds and Comerex, or US-delivered pounds. And the closure of Metropolis Works’ conversion facilities played a huge role in that. I didn’t get any clear indications from the call as to how they saw conversion playing out one way or another. What is clear is that utilities need to be bringing material all the way through the nuclear fuel cycle to generate demand for conversion. If they are still wearing off or working off their EUP, their enriched Uranium product and their advanced fabricated fuels, then they’re not going to be putting a lot of pressure on the conversion market. Cameco understand that stuff really well so they’re probably, they have got that part of the market measure and they’re thinking clearly about it.

Matthew Gordon: Your view of the quarterly call: measured as ever? I’m not sure it gave confidence to the marketplace, but have they have made the right decisions, for the right reasons?

Brandon Munro Yes. I’d say so. It was somewhat subdued compared to the last call if you had listened carefully to the tone. And again, that’s understandable. They would have known that the message wouldn’t have been well-appreciated by everybody. There would have been an element of reticence to delivering that message. And also, they are not coming off a quarter of growing Uranium prices like they were the last couple of quarters. So overall, not surprising. Somewhat subdued, but certainly not a trigger for the selloff that we’ve seen. I’d agree with you; for people who are accumulating Cameco, they would have been rubbing their hands with glee yesterday.

Matthew Gordon: It’s time to move into the Crux Investor club members section. I’m going to say, thank you very much for listening today. I hope you enjoyed Brandon’s views on the Cameco quarterly call and the interpretation that he has given us. We are not going to move and talk about a few other topics – quite interesting in terms of what is going on in the market, with our club members, so we’ll see you again next week.

Company Page: https://www.bannermanresources.com.au/

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Bannerman Resources (ASX: BMN) – Uranium Player Reduces Scale and Transforms Value Proposition (Transcript)

Bannerman Resources Ltd
  • ASX: BMN
  • Shares Outstanding: 1.06B
  • Share price: A$0.04 (06.05.2020)
  • Market Cap: A$43M

Interview with Brandon Munro, CEO of Uranium Developer, Bannerman Resources (ASX:BMN)

READ ARTICLE FOR THIS INTERVIEW HERE

Bannerman Resources is a uranium junior with a large uranium project in Namibia called Etango. The big sticking point for Etango has always been the large CAPEX: US$780M indicated in their DFS and the Africa factor.

However, today’s scoping study could well go some way towards changing that sentiment. The scale of the project has been much reduced; the CAPEX is now down to just US$254M. This is now a much more manageable project and their optionality around financing has been enhanced. Bannerman Resources now has the optionality to turn this uranium project into a reality in a variety of ways.

A new PFS and DFS are now on the horizon and should follow in around 18-months. Bannerman Resources could now be primed to time its entry into the next cycle perfectly.

We discuss:

  1. 2:36 – Company Overview
  2. 3:49 – Scoping Study Results: Why Did it Take So Long?
  3. 7:25 – What They Had vs What’s Possible Now: A Look at the Numbers
  4. 11:33 – 3.5M pounds vs 5 or 2: Discussions and Decisions
  5. 14:04 – Options for Financing it: Cost Drop to $65
  6. 21:13 – Middle East Becoming a Player in Uranium: Benefits and Concerns
  7. 23:17 – Still to Come: Speed, Process, Risks, Costs
  8. 32:03 – Market’s Reaction: Does Anyone Care, Should They?
  9. 34:39 – Mitigating Board Concerns and Issues
  10. 36:53 – Timing it Perfectly: How Do They Know?
  11. 39:58 – Sneak Peak to #19 of the Uranium Series with Brandon

CLICK HERE to watch the full interview.

Matthew Gordon: Brandon Munro, how are you, sir?

Brandon Munro: I’m really well. How are you, Matt?

Matthew Gordon: Saw the announcement this morning – some good numbers on there. But before we dive into that, can you just for people new coming into the Uranium space and looking at various Uranium stories, it might be worth giving a one-minute overview of your project. Then I want to talk in detail about your Scoping Studying numbers.

Brandon Munro: We are Bannerman Resources. We are listed on the ASX. Our project is the Etango project in Namibia. We’ve been focused on Uranium since 2006, and the project has been subjected all the way through Feasibility to a DFS and then even a pilot plant. But as we’re about to discuss, we’ve now gone back to the future in terms of a Scoping Study with the Etango 8 project. It has got environmental and social permitting. We love operating in Namibia and we are quite active in the nuclear sector as well, which helps us a lot when it comes to talking about how to understand this sector, how to market to it and how to build a project in an industry that can be quite complex.

Matthew Gordon: We’ve noticed you have a DFS from 2015. Huge CAPEX, and I think that was a problem for the marketplace. People thought this is too much money to raise, and there’s only going to be a few options available to you in terms of funding. I think that was a concern. You have addressed it with this new Scoping Study, well, I think that’s what you’re trying to do. So maybe if you could explain why you’ve changed things up a bit.

Brandon Munro: Yes. It was a problem for the market, for the stock exchange market, investor market. And we have, like all of our peers in this deep Uranium bear market, we have had a diminishing market capitalisation. And when you apply as typical metric against the capital costs, which in our 2015 DFS was USD$793M, you end up with an equation that requires some fairly significant financial steps to be taken. Now having said that, I would say in our defence that for this sector, for the Uranium sector and the nuclear energy sector, these are still relatively small numbers. You have got to remember that the number of reactors that our project could service at those numbers had a construction cost well north of USD$80Bn. But be that as it may, we are not servicing reactors at the moment. We are striving to add shareholder value. And for some time now, we have been looking at what we can do with this project to get an initial or a start-up scale with a much lower capital hurdle that gets us into business. And then depending on how the market progresses from there, we are in a position to either continue at that level for a long mine life, or we have got the option of adding another train and increasing the scale of our production to take advantage of a greater proportion of this enormous ore body that we’ve got at Etango in Namibia.

Matthew Gordon: You have listened to the market, that’s clear, but why did it take so long? The DFS was from 2015. It’s 5-years later that you are now coming out with these smaller numbers. Why so slow?

Brandon Munro: Yes, that’s a fair comment. So there are a couple of things to think about: first of all, when the DFS was scoped out, so we did release our initial DFS in 2012, when that was scoped out, it was pre-Fukushima, and this sector was enjoying the nuclear renaissance, it was crying out for pounds. The 7.2Mlbs p/a average production rate for that large project was entirely appropriate and certainly a competitive advantage. Then the market took some time to react to Fukushima. It took some time to be obvious what the demand destruction had been there and for that recovery to take place. But also, we need to remember that there has been a number of technology enablers for us to be able to do what we’ve done here. Back in 2012, we didn’t have the nanofiltration and membrane options that we’ve managed to incorporate into this project. That has dramatically improved our recoveries and it has also improved our reagent usage and really decreased our acid use. We needed those wins to be able to dial back the project to a much smaller scale whilst maintaining robust economics. And look, the other thing that I’d just say about this is, there was a lot of scaling work done including projects that were underway when I came into this role in 2016, but it was only when we really dialled it back significantly that we stayed within a pit shell configuration that really dropped the stripping ratio down to a point where we could do what we’ve been able to do with this Scoping Study.

Matthew Gordon: Give us some of those other numbers. In terms of being able to do some comparables from what you had, which I assume is still an option, but you are parking it up in favour of this new Scoping Study, this new direction, but can you help us with the comparison of what you could do versus what you are now going to aim to do?

Brandon Munro: Sure. And look, let’s come back to that question about what the giant project is still for us and what options that gives us, because I really do think that that’s important for shareholders and investors to understand. First of all, on CAPEX: the 2015 DFS optimisation study came out with a CAPEX number of USD$793M. What we have here is a project that we’ve called Etango 8. We’ll be calling it Etango 8 from now on. And that refers to the throughput that’s going through the mill. The giant project was 20M tons p/a through the mill or the processing plant. Etango 8 is 8Mt p/a. In other words, we’re putting only 40% of the material through the mill that we would otherwise, but because we get a little bit of a kick in grade, we are operating for the first 50Mlbs in slightly higher grade, so we get a 20% kick. In actual fact, we operate at a 40% throughput, but we get about 50% of the production, so 3.5Mlbs p/a.

So, back to capital costs: USD$793M in 2015, we have now got half of the production, but we brought that capital all the way down to USD$254M as a pre-production capital number. And not only that, but the sustaining capital has been reduced dramatically by about USD$250M over the life of that mine. Our All In Sustaining Costs have come down significantly as well.

One thing that’s very important is, quite often with a big project like this, you can simply do a trade-off. You can trade your upfront capital for increased operating costs. And we’re very proud to say that we haven’t needed to do that. The cash costs have remained pretty much exactly where they were at circa USD$37/lbs. And the All in Sustaining Costs is just a smidge over USD$40/lbs. At the moment it is USD$40.90/lbs, which are very comparable with what we had back in 2015.

The total throughput, or the total proposed mine over the life of mine is 51M lbs. And that compares with 113Mlbs under the 2015 DFS. But of course, those pounds aren’t going anywhere so that is one of the things that just gives us so much optionality going forward once we see just how deep this market deficit is and what that ultimately does for pricing.

In terms of what our pinch points are, when we did the 2015 Optimisation Study, we assumed a price of USD$75/lbs. In this case, we have been able to assume a price of USD$65 p/lb and still end up with an attractive NPV. At that level it’s USD$212M. It’s still a very significant premium over our current market cap, which before we started trading today, sits at circa USD$30M. There’s still a lot of room for investors to enjoy our progress as we progress this project.

Matthew Gordon: I don’t want to get into a macro discussion with you, because, the price today is at USD$32/lbs or thereabouts. You are talking about USD$65/lbs. We’re a long way from that, but you and I on a weekly basis, talk about the macro coming. I’m going to park that for this conversation if I may, or maybe we’ll pick up on it on the end. Just to help me understand the decision-making that’s going on at board level, because it’s an optimisation process that you have gone through, and so why is it 3.5Mlbs you’ve settled on p/a versus 5Mlbs or 2Mlbs? What was the thinking? What was the discussion around that?

Brandon Munro: Well, initially we dropped the production throughput dramatically down to 5Mlbs. As I said, we had done previous exercises in testing reductions in throughputs down from 20Mlbs per annum, where we started in 2015, down to 15Mlbs and 10Mlbs, and by looking at things differently, we said, what if we stay within a very low strip ratio zone of the ore body, because our ore body does outcrop. We get a nice win in the early years. And we reduced it all the way down to 5Mt p/a and saw some very promising results there that gave us the confirmation that, yes, this is a viable alternative to invest further in. And then what we did is basically pitch our optimisation. We worked with AMEC Consultants, who are very, very talented mining engineers out of Namibia. They have done a lot of the work for Rossing and others, and they ran the different pit shells and optimise the NPV at 8Mt p/a. And from there, we just had to cross test against various tolerances such as what impact does that throughput have on external infrastructure, et cetera, et cetera. And we came back very comfortable that that was both the right economic number for the pit. It was the right economic number for water and power and other things that we were looking to get a win on by reducing our demand and also the perfect number for the market – 3.5Mlbs, I think is an ideal number for the market, as we can predict and understand it over the next 3, 4, 5-years.

Matthew Gordon: That’s another interesting point, and perhaps one for another day in terms of how you quantify how many lbs you’re going to be able to sell into market. We have looked and studied; some companies are predicting much higher numbers from scratch, having never produced before and getting that into market. So, as you say, I think that is a conversation for another day, but what I’m surprised you didn’t mention there was part of the factor being what you thought you could get financed, because with a lower CAPEX, I’m assuming you are opening up your options. People have always thought USD$800M – that has got to be the Chinese. That’s the only way you’re going to get financed. And they are looking to hear you talk about relationships with Chinese groups, which you have intimated, but at these sorts of levels, what other doors do you open?

Brandon Munro: Well you’re right: the Chinese option, if I can put it that way, certainly is very valid. I mean, we’ve talked at length about how China’s demand for Uranium going forward is absolutely voracious. Whether they are a financier, whether they are an offtake partner, whether they are a customer, whether they are a joint venture, all of those options still remain equally valid here. But as you point out, Matt, we do now have many other options. There are vertical integration-style options into a variety of different players that perhaps we couldn’t have achieved at 7.2Mlbs p/a because we were just too big to vertically integrate into a nuclear power business. Whereas now at 3.5Mlbs, that services say, 8 or 9 1Gw reactors per annum. There are many players who have a fleet of that size, or intentions, or plans to create a fleet of that size who could then look at us as being a large part of their solution for future security of supply, in whole or in part.

It also makes us attractive from a conventional financing perspective. At USD$65/lbs, we’ve got an IRR that’s in the 20s. Before, at 2015, we would hit 15% IRR at a USD$75/lbs price assumption. We have now got something that looks a lot more robust, not only in terms of the absolute amount of capital required if we would go to conventional financing, but also in terms of the returns that we can offer investors down that path. And because of the optionality that we’ve got with the bigger project, it opens a number of different strategic options for us to start looking at other assets, and when we start to see this whole sector move more into a consolidation phase, we have now effectively got two approaches to offer when it comes to a consolidation. We have got a 3.5Mlbs production project that’s got low CAPEX, relatively low CAPEX hurdles, environmentally approved, and all of that sitting in Namibia exactly where you’d want it, but there’s also still the giant that’s sitting there. It’s got a DFS, it’s got a pilot plant. No-one can take that away from us. All of the pounds of there; there are still 271M lbs Uranium sitting there in the resource, and we can now work up the 3.5Mlb project – Etango 8 through PFS, DFS, all the while keeping a very keen eye on the market. And if the market does what certainly I hope it will and most Uranium investors do well then that giant size project is still going to be very much a viable alternative, and it really comes down to what market sizing do we want to offer.

So I think that breadth of possibilities, including the lower hurdle to get into production with Etango 8 creates a, a multitude of opportunities for us: to build the project ourselves realistically, to conventionally finance it with offtake arrangements through to other arrangements, including consolidations, peer mergers, vertical integrations, soft debt, and financing. I really feel like we’ve now got all of that in front of us, and very much looking forward to seeing how the market plays out as to which of those are going to deliver the best shareholder value

Matthew Gordon: You have reduced the price of Uranium in your calculations from USD$75 to USD$65. Where has the confidence come from to do that?

Brandon Munro: Well, we’ve done that really just to demonstrate that the hurdles for getting into production are significantly decreased. It’s not about my level of confidence for this market by USD$10/lbs. It’s rather being able to demonstrate that we can produce a 20%+ IRR and a 200M-od NPV at USD$65/lbs. Of course, at USD$75/lbs it looks even better and at USD$80/lbs, we would probably start thinking about the bigger project because of the extreme leverage that we get from that. And look, USD$65/lbs is very consistent with many of the guests that I’ve seen you talking about. That seems to be a well-accepted number on the production side. And I can tell you, when you have closed-door discussions with utilities, you don’t get any eyebrow raising at USD$65 either. It is a distance from where we are at the moment, and you get people on Twitter, YouTube in private conversations, who might say, well, look, where are you going to be at USD$55/lbs? What happens? But what investors need to understand is that there is no single clearing price when it comes to term contracts. Utilities will operate within a band. They’ll have a whole portfolio of contracts, some of which will be below USD$55/lbs, some will be above USD$65/lbs, and they need that band to achieve enough fuel to go through their reactors. So this concept of us sitting at USD$55/lbs, for example, for some time well, that’ll be great for 60% of the market because Cameco can happily produce into that, and KazAtomProm can happily produce into that, but where is the other 40% of the market is going to come from as we start to see this this deep depletion of supply from 2024, 2025? So, we will be there. We will be there waiting for that. And if we do see a situation where it’s still USD$55/lbs, we know that we will have utilities banging down our door very soon after that, as they realise that that theoretical number of USD$55/lbs only fills their reactors with 60% of the fuel that they need. And at that point, because of the dynamics with nuclear fuel being still only a fairly small proportion of the cost of producing nuclear power, they will have to come to the market at whatever cost is required, because it’s not a very happy situation to run a reactor at only 60% of the fuel that it needs.

Matthew Gordon: That is a consistent story. We are hearing that number from the US Uranium producers. We are hearing that from the Canadians, we’re hearing that across the board. It will be interesting for me as an investor to see how quickly that price discovery comes. But yes, I buy your argument.

The Middle East is becoming a bit of a player now, and being in Africa, and we have seen in other sectors, groups in the Middle East coming down into Africa for like food security, food supply and other mineral resources. Is that a reasonable likelihood? Is that a conversation you could have, or does that put you at a disadvantage when talking to US utilities?

Brandon Munro: It certainly is an interesting part of the sector, for the Uranium sector generally, but also this type of financing. It’s well known that Middle Eastern groups have got very deep pockets. It’s also quite well understood that they are looking to transition away from a dependency on hydrocarbons. And we’ve seen that both through the Emirates program at Barraca, where the South Koreans have completed their first reactor and there, they’ll install 5.6Gw there at Baraca. We’ve also seen it in Saudi Arabia, for example, where they’ve announced plans to construct a nuclear fleet over the next decade, of 17 reactors. A lot of that’s driven by the desire to install nuclear power for desalination purposes, which of course, in that environment dramatically opens up a whole number of facets of their society in their industry.

So, what we can offer either to middle Eastern groups, as customers, to Middle Eastern groups as offtake partners, or potentially as financing solutions, is this capacity to deliver 3.5Mlbs, support 8, 9 reactors. Or if you look at it another way, it can support a reactive demand for 2.5M lbs plus slowly build-up inventory. That, with the African connection that you’ve just identified, I think is a very powerful option for us and something that will make those conversations quite interesting when it’s time to have them.

Matthew Gordon: This is just a Scoping Study. You need to do a PFS, you need to do a DFS. And if I follow your line of argument with regards to market recovering because the supply and demand story that we’ve talked about on numerous occasions, you’re going to need to get a move on. How quickly can you deliver that? What is the process that you are envisaging?

Brandon Munro: We have really got an advantage here, because we’ve beaten this path. We’ve constructed the broad highway, which is a DFS with all of that cost and expense and resources, and now we just need to lay a little bit of a one-lane next door to it with this Scoping Study. So really what that means in practice: if you look at the cost, the risk in terms of blow out of budget or timeframes to move from Scoping Study to PFS, and also where the technical risk or the failure risk lies, the key things are first of all, number 1- the risk associated with the ore body and the requirement for resource drilling. We don’t have that. We have drilled 360,000m into an Etango, so there’s no more drilling that’s going to be required.

The next big risk factor, particularly in a Uranium projects is metallurgy. Again, there’s nothing more that we can do in metallurgy. We have had a demo plant, a pilot plant operating for 3-years. And the final risk factors environmental. Normally at this point, you’ve completed your Scoping Study. You’re moving towards a PFS. It’s about starting to get your baseline together, starting to think about how you’re going to obtain environmental approvals. Now, we’ve got the environmental and social approvals already in place for a much bigger impact project, so that’s not an issue either. We feel that we can move through a PFS in a very quick timeframe for what is still a very big project at 3.5Mlbs. We think we can get that done in about nine months. And although we haven’t yet appointed the consultants that we want to use for the PFS, we think that we can get one done for very good value for such a big project.

We want to go with top shelf, high calibre consultants so that this outcome and this product very much sits alongside the high-quality technical work that’s already been done since 2006 at Etango. And we don’t see why we can’t get all of that done for AUD$1M. So that means that with our cash balance, we’re still in a very strong position here to move it forward. And to answer your question more directly, we’re ready to get on with it. We’re ready to get hopping here. We think that we can time this project perfectly for when the market is going to be crying out for 3.5Mlbs.

Matthew Gordon: Tell me a bit about that: so it’s going to be 9-months to deliver the PFS from when you appoint your consultants. You must have a view then as to when you think the market is going to recover, to be able to say, we’re going to time this perfectly, because after you do a PFS, you’ve got more studies to fund. How are you going to do that? Or are you going to leave that until further down the line to try and work out when you think the market will be a little bit better?

Brandon Munro: Yes, we have got 9-months of PFS, and we anticipate that a DFS would take about another 9-months. And realistically, you’re not going to be marketing with any certainty to utilities until you are towards the end of the DFS process. You can’t really commit to long-term contracts until you’ve got that level of certainty, even with all the advantages that we’ve got. I would say that’s the timeframe, and fast-forward 9 to 12-months from here with all the macro dynamics that we’ve been talking about and the huge gaping deficits that we’re seeing open up in this sector, that’ll be perfect timing, not only for making the decision to progress to DFS, but also in terms of having those conversations with utilities.

Matthew Gordon: You’ve got a PFS coming. It’s going to cost you around AUD$1M. And to do a DFS, what’s that going to cost you? How much cash have you got left today? And are you going to need to raise capital in the market to get that over the line?

Brandon Munro: Well, at the moment we closed 30 June with AUD$4.2M. So, obviously, if we spend, let’s call it $1M on the PFS, we’ve still got more than AUD$3M. For the last 12 months we burned through a smidge over $2M. We’re running at $500,000 per quarter cash burn, including the project work. We’ve been able to get the Scoping Study done and all of the other optimisation work, run the demonstration plant, complete the membrane test, work to a DFS level. We have been able to achieve all of that within a $500,000 per quarter cash burn. We’re pretty tight.

You can extrapolate from that, that after deducting AUD1Ms for the PFS, we have still got more than a year of runway. And from there, we can look at what the market looks like and decide at what pace and, whether we are prepared to use existing cash reserves to fund a DFS, or if we need to go back to the market for that. But I think the key point is, we don’t need to raise anytime soon. We’re not under duress to raise in a flat market, as we’re seeing at the moment, and we’re going to be able to put out some good numbers before we need to think about using cash balances versus raising fresh equity to progress the project,

Matthew Gordon: Looking at this Scoping Study. It’s early stage. What I need to believe is that these are accurate as can be, and you’ll get more and more accurate the more work you do through the PFS and DFS. But, you are going to market with a pretty big claim here. How have you managed to, for instance, keep the capital cost and the operating cost down like this, because it seems to me the bulk tonnage operation, the economics should change?

Brandon Munro: So there’s a couple of things to say about that: the first one is it is a big change in capital. It’s $793M down to $254M. It’s a much greater than proportionate drop in capital, but there are some good reasons for that. First of all, of course, the throughput is 40%, not 50%. The output is 50% because we get a kick in grade, but the throughput is 40%. So immediately that’s going to reduce certain capital items. But the big win for us has been the capacity to move from owner mining, to contract mining. So that has reduced over USD$100M of pre-production capital because we don’t need to buy the fleet, and we have taken USD$250M out of sustaining capital over the life of mine because we don’t need to service and replace the fleet and so on. So that has punched a big hole in our CAPEX.

Another one is, because we were under the DFS operating at such a large scale, a number of the aspects of that scale required a special solution. The best example is the heap leaching. We had what’s called a racetrack heap leach system, which is used in enormous copper mines in South America and elsewhere in the world. But there’s quite a lot of kit involved for that. Now because it’s a much smaller throughput, we can go for a more conventional stacking of our heaps and that’s taken circa USD$80M out of the infrastructure bill that we have got.

There are a few other things that start to add up: because our power requirements are less, we don’t need to build a substation. We can just run a line from the existing power infrastructure that is around the corner. There are other things like that.

And then the final thing is that we have been working hard on this project since 2015, and there’s a number of smaller wins that we’ve had that just add up and accumulate. For example, what we released in the processing optimisation study in 2017, we’ve been working on the membrane study, so we’ve now moved from SX, solvent extraction, to iron exchange with nanofiltration. All of those things start to punch small holes in capital that then add up. When you start to run down the list of where we’ve had those capital wins, bearing in mind that we’ve punched a huge hole through switching from owner mining to contract mining, I think we have presented very credible numbers.

Matthew Gordon: How do you think the market is going to react to this story? Do you think the market cares?

Brandon Munro: I think it will care. I definitely think it will care. This is fantastic news for Bannerman. It might take a little bit of explaining. It might take some time for the market to fully react, but we need to look at what has happened here: Bannerman has been regarded as an out-of-the-money option on a very, very big project for quite some time. And now what we’ve done is we’ve retained all of the advantages of that very, very large-scale project and what it can offer strategically to multiple parties in this sector, and delivered in the Scoping Study phase an attractive developable project that still has significant size compared to our peers. It is still amongst the largest development projects out there that can produce within a few years in a jurisdiction where we’ve already got environmental and social permitting. and socially, politically, and environmentally, they are very comfortable with Uranium mining. I certainly think the market should care. We can have a chat in a couple of weeks’ time and just see how much it does, but I’m excited about this. And I’ll be very surprised if the market, with a bit of time to explain what we’re on about here, I’ll be very surprised if the market doesn’t get excited behind us as well.

Matthew Gordon: But it doesn’t have the sex and the sizzle of the Athabasca basin; it’s Africa. I think that’s something that’s thrown at you guys a lot. How do you respond to that?

Brandon Munro: We are going to be producing pounds before the Athabasca Basin, so you can have all the sex and the sizzle, but if you’re looking through a bulletproof window at that sexy, sizzling project, then it doesn’t do you any good.

Matthew Gordon: What do you mean by that?

Brandon Munro: Well, you need to be able to step through and produce pounds, environmentally, socially, and politically. And in Namibia, we can do that. We can do that. We need to get our studies done. We need to get our contracting and financing done. And then we’re away. Then we’re away. We’re not still doing environmental baselines. We’re not still waiting for environmental approvals and so on. I hope for my colleagues in Athabasca, that those things come quickly for them. The market is going to need them. I certainly don’t feel threatened by a bunch of production coming in from the Athabasca, but that is still a big process that needs to take place. I’m delighted to say that we do not have that ahead of us.

Matthew Gordon: You have got a pretty experienced board. It’s something we have talked about before, and it’s something I keep reminding investors about. What have been their concerns with this segue from large project to small project? What are the issues that they wanted to deal with and what are they issues that they still think lie ahead?

Brandon Munro: The biggest issue in terms of dealing with this is, I like to say that I’ve got a healthy degree of scepticism around the boardroom table. And really, truly that is the best board to have. It’s far from a group of ‘yes men’. I’d like to think that I have built the board’s confidence over time, but I get plenty of difficult questions from them. And that is ultimately the best approach to take. They’ve been sceptical about whether you can take a bulk tonnage project such as what we’ve got here, dramatically reduce its throughput and end up with better project economics. So that is what has pushed us through this process. I am pleased to say that we’ve proved it now to the board. So that is no longer a scepticism that we need to deal with, and there’s a lot of good reasons why we’ve been able to accomplish that, because of stripping ratios, slight increases in grade.

Going forward, I think the main challenge that the board sees is educating the market into understanding that this is an and/or. Markets often can only really like latch onto and think about one scale of project, and obviously, that’s what we’re going to be talking about for quite some time, because that’s what we’ve now got to explain to the market. But the board sees my challenge as reminding everybody that 20M ton of Etango producing 7.2Mlbs is still an enormously valuable asset for our company, even though all of the news flow and all of the focus and everything that we’re going to be talking about is at Etango 8 – the 8Mlbs a ton p/a project that’s producing 3.5lbs p/a.

Matthew Gordon: I want to go over some of these numbers. So 9-months for PFS, you’re going to skip the Feasibility, go straight to DFS. Let’s say that thing gets wrapped up in 2-years, 2-years to construction, so 4-years. So why do you say you are timing this perfectly? What makes you say that?

Brandon Munro: Because when you look at let’s use the WNA numbers, because as I’m very familiar with those. What we see from the WNA reference case and in particular, the uppercase, is you see supply depletion in this sector really start to bite from 2024 and in particular 2025. And this is all putting to one side, all of the supply disruption that we’ve seen because of COVID. Now, we are just ignoring that for now, but if you think about it: 2021, Ranger – one of the biggest Uranium mines, historically comes out of production in January, this coming January. COMINAK in Niger ceases production in 2021 as well. By 2024 and 2025, we’ve got that supply depletion exacerbating by certain Kazakh assets starting to deplete. And when WNA in their nuclear fuel report, start to model out that Uranium supply that can come back into the market, even after allowing for projects, including a Etango to get into production and start producing, even after allowing for all of the care and maintenance projects: McArthur River, obviously Cigar Lake coming back on. Langer Heinrich and others, there is still a big gaping supply gap opening up from 2024, 2025.

The events that we’ve had just now with COVID-related supply disruption, they are going to continue into 2021. They are going to have the effect of really tightening up remaining inventory and getting the attention of utilities. And I think, shifting this whole dynamic from where it’s been of complacency with cheap Kazak over-production being available for several years through to concern. And if we can time that inflection point from complacency to concern and be in front of utilities with a viable project that has relatively low hurdles to development. That’s why I say we can time this perfectly. We can be in front of utilities, presenting a solution to the extent of 3.5Mlbs exactly at the time when they are going to have to be thinking very, very hard about where they are going to get their lbs from 2024, 2025 onwards,

Matthew Gordon: It feels like you’ve been biding your time, waiting for the moment, and to get this study out now, it really is a different Bannerman from the last Bannerman that I spoke to. I will be interested to see the progress over the next few months. Certainly, when you commission the PFS and get that going, I think that’s going to be a real, real moment to truly get behind the economics that you’re purporting you should be able to achieve.

Brandon, thanks very much for that run through. I appreciate that. And we will catch up later this week to talk about the KazAtomProm quarterly as well, if you don’t mind. In summary, what was your take on it?

Brandon Munro: I think that the most important comments in that relatively short document was, first of all, KazAtomProm confirmed that they’ve entered the spot market. It has been something that’s been rumoured for a while. Now we know that that is the case, and we know that they are going to have to continue in the spot market. The other thing that they acknowledged that will start to get the attention of generalist investors in particular, is they acknowledged a severe impact on their production in the second half of this year. And that’s because, something that we’ve talked about a lot – the lag effect, and they said that that lag effect could continue as long as nine months from the disruption. So even once they are back in business, we’ve still got many more months of disruption coming out of Kazakhstan. So that’s now very much put 2021 under doubt. And remember it was only last week that Cameco started to raise the possibility of Cigar Lake production in 2021 being under guidance because of delays in doing some of the forward development work that they’d need to, to ensure that they are producing at 18Mlbs in 2021.

What we’ve got out of that is: they are not acknowledging any further delays to them getting into a return to production. They are emphasising that it’s going to be slow and cautious. They are already in the spot market, and this is going to be a supply disruption that’s going to keep giving to investors for quite some time.

Matthew Gordon: I’m looking forward to talking about that with you later this week. Congratulations on the Scoping Study and the numbers. I think that puts you in a very unique small group, a category which should get people’s attention. I look forward to seeing how people react as well. Thanks again. I’ll speak to you later this week.

Brandon Munro: Yes. Thanks very much. Thanks for all the good questions. Tough questions. I enjoyed it.

Company Page: https://www.bannermanresources.com.au/

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Energy Fuels (NYSE: UUUU) – Uranium Investors Looking to Critical Minerals Hub (Transcript)

Energy Fuels Inc
  • NYSE: UUUU
  • Shares Outstanding: 115M
  • Share price US$1.78 (01.05.2020)
  • Market Cap: US$205M

Interview with Mark Chalmers, President & CEO of Energy Fuels (NYSE: UUUU)

Energy Fuels is America’s leading producer of uranium and vanadium and is venturing into the rare earths space. All critical and strategic minerals in the US. So who owns the only processing plant in the US?

We caught up with Chalmers to get the latest on how he is re-shaping Energy Fuels into a tantalising value proposition by building a critical and strategic minerals hub at their wholly owned White Mesa Plant. There have apparently been plenty of catalyst moments within the uranium space over the last few months, predominantly surrounding the destruction of inventories and tightening of supply caused by COVID-19. But nothing has touched the sides. The US House of Appropriations Committee recent decision to block the funding of a US uranium reserve appears to be another minor setback for uranium bulls, but Chalmers doesn’t see it as a definitive “no.” He experts the topic will be revisited one the DoE can provide a little more clarity on how exactly the reserve would be implemented, at some point in the next 180-days.

Courtesy of its strengthened balance sheet, Energy Fuels has been able to redeem half of its C$20.86M convertible debenture loan, with the rest of it due at the end of this year. The company will avoid approximately US$350,000 in interest payments in 2020 as a consequence. Uranium juniors across the land are currently running up big debts to fund exploration programmes for assets that are as yet not proven economical. Energy Fuels seems keen to set itself apart as a logical option for new uranium speculators.

Their real key differentiator is their White Mesa Mill in Utah. The only remaining fully-operational conventional uranium mill in the US is coveted by many, but some investors have not yet recognised the full extent of its capabilities. It is able to process uranium, obviously, but it is also able to process vanadium and Rare Earths. Which, Chalmers argues will be crucial as America might see REEs as strategic commodities and is attempting to build a new global REE hub to rival the status quo of Chinese dominance. 5 companies have recently told us they will be using White Mesa Mill to process their uranium, but Chalmers says he has had no discussions and has signed no agreements with anyone. In fact, he has blunt message to uranium companies claiming that they will be tolling at White Mesa: STOP. Energy Fuels is likely to enjoy a monopoly over Northern American uranium juniors who face the choice to pay a toll fee to Energy Fuels’, or ship ore more expensively to South America. The competitive tension is palpable.

With consolidation in the industry becoming more likely, especially to make the utilities take producers more seriously, Energy Fuels could well be looking at M&A in the future. We challenge Chalmers on what exactly he could be looking for.

We Discuss:

  1. 3:50 – Opinions on the US House of Appropriations News
  2. 6:17 – In Control: What Have They Been Doing?
  3. 7:53 – Relationships with the Government: Agendas and Capitalization
  4. 12:12 – RSA Deadline: News and Views
  5. 16:22 – “Cheaper for Longer”: Utilities, Producers and Timings
  6. 22:37 – Paying Down Debts: Why Pay Early and What Happens at the End of the Year?
  7. 24:30 – Possibilities of Selling Inventory
  8. 26:30 – Get in Line for the Mill! Companies Allegedly Partnering with Energy Fuels
  9. 28:10 – ASX Junior M&A in the USA: Why Didn’t US Companies Pick Those Assets?
  10. 31:02 – Viewer’s Question: Any Plans to Buy Uranium?
  11. 34:47 – Rare Earth Possibilities: Discussions with Constantine Karayannopoulos

CLICK HERE to watch the full interview.

Matthew Gordon: Mark Chalmers, how are you doing, sir?

Mark Chalmers: Very good, Matt, how are you?

Matthew Gordon: I’m excellent. I haven’t spoken to you since we were at AUSIMM online virtual conference together. How did that go?

Mark Chalmers: It went really well, Matt, and I’ve mentioned to you that that’s an event that I’ve chaired for 15 consecutive years, and I was very pleased that we got it up this year. 15th year in a virtual format, and we had a very good attendance and some really excellent speakers.

Matthew Gordon: And that’s tough, going from an actual, in-person type conference to doing something virtual. But you had some amazing people on there. We have been watching back some of these sessions. It was a good session. So thank you for putting that on, first of all,

Mark Chalmers: My pleasure. And we tried to broaden it out a bit more this year with things like the small modular reactors. And that was popular, broadening that out a bit.

Matthew Gordon: Yes, definitely.  it’s quite good, we try to do it as well, which is trying to help educate people about Uranium. Because what we’re seeing now is a lot more well, new investors coming into the world of investing, but also generalist investors who perhaps haven’t considering Uranium before. All of them are asking questions, which it’s easy for people like yourself, or certainly even us to forget that people are coming into this new. All of this is good, good information. But we are not here to talk about AUSIMM. We are here to talk about Energy Fuels. I want to start specifically with the recent announcement by the US House of Appropriations to say no to the funding of the Uranium reserve. How do you feel about that?

Mark Chalmers: Well, look, it was something that we didn’t want to have him say no to, but it’s not like no-no. They zeroed it and they basically said they didn’t have enough information from the Department of Energy on how the program would be implemented. And the belief that DOE is trying to answer those questions as we speak. The DOE is also looking for other sources of funding the reserve. Secretary Brouillette has been out publicly saying that he has very strong support for the Uranium reserve. The Senate is behind it, or at least the Republicans in the Senate are behind it. So, it is a setback, but it really reflects on the differences between the Republican party in the United States and the Democrats. But we are making progress with the government bipartisan-wise, because of the dependency on Russia for Uranium products and in China. There is progress being made it just isn’t every day that you make a step forward, but we are making steps forward, more steps forward than backwards.

Matthew Gordon: Are you saying that the House turned that down purely on political reasons or did someone not do their homework and provide the information that had been requested?

Mark Chalmers: Yes, it is a combination of those things. We are certainly doing everything we can you to get it back into the House bill and ‘unzero’ it. But, these appropriations are like trading exercises between the both parties and different people’s interests, but we have very strong support in the Senate and the DOE and this increasing threat of Russia and China, particularly Russia for nuclear fuel products. So a lot of, or a number of Democrats are recognising that, but some of the Democrats are opposing it for other reasons and that’s politics

Matthew Gordon: That’s politics. So, talk to me about, so that’s not in your control, it was never in your control. It was something that you highlighted, but you have got to focus on things that are in your control. What are you doing that you can manage?

Mark Chalmers: Well, let’s look at a lot of the work we have done through the Section 232 process of the Nuclear Fuel Working Group, in the strong policy statement that the nuclear working group report that came out of the working group, that is still helping us on a lot of fronts, not just in appropriations, but also in some of the negotiations on the Russian Suspension Agreement. Basically, the Working Group said that it is a national security issue, receiving so much of our Uranium from imports and particularly from Russia, so that is helping us in other areas. And, we’re still pushing on all fronts: appropriations and our participation in the negotiation of the Russian suspension agreement. But we are managing the company on the company basis alone, not dependent on government support. We have seen some increases in Uranium prices over the last couple of months. They have flattened out lately. You’ve got to multitask in this business, if you don’t multitask you will not survive, but we are in very good position amongst our peers, and we are very excited about the future.

Matthew Gordon: Sticking with the government components, if we may, you have, over the past couple of years, been talking to people in DC, up on the Hill, as the phrase goes. Have you made relationships, or have you made useful relationships? And at what point do you start cashing in on those? Because at the moment they’re not giving you what you want.

Mark Chalmers: Yes. The cashing in is the difficult part. We certainly have the strong relationships in the push of the administration. There there’s some indirects here that we are cashing in on, and the Nuclear Fuel Working Group is one of them. Take the Russian Suspension agreement; that expires at the end of this year. And there are active negotiations on that front. But for example, one of the key issues with the Russian Suspension is that the Nuclear Fuel Working Group says that we’re overly dependent on Russia and state-owned enterprises. So that’s a very strong policy document, basically prepared by about half of the president’s cabinet. And, that’s something very powerful to use in those negotiations. It is not always completely clear to particularly, some of our investors, but we are punching above our weight in DC on a lot of these fronts. It is frustrating because it has taken a lot of time and we haven’t seen the money in hand yet, but it is getting through people’s minds that we are overly dependent on critical minerals, particularly Uranium, Vanadium and Rare Earths in the United States right now.

Matthew Gordon: The strategic minerals, the critical minerals component is really interesting to me. There are relationships that are being formed or have been formed, they are recognising this. But my view on this is, politicians – they always want something from you. They aren’t necessarily going to give you anything back. You’re making them, you’re giving them a topic that they can promote themselves and their own agendas on, but do you seriously think that Energy Fuels is going to be able to capitalise on this? For instance, you have been talking about Rare Earths recently, are you hearing things which make you think we need to lean a little bit towards Rare Earths, because those are the sorts of noises coming from the Hill?

Mark Chalmers: You’ve heard me say it many times that we are first and foremost a Uranium production company, but we do think that the Rare Earths sector fits very nicely in what we do, our core business, because we can recover the Uranium from a lot of these Rare Earths. A lot of our political supporters on the Uranium reserve and the nuclear fuel cycle are also the exact same supporters for reducing our dependency on China for Rare Earths. It all fits nicely together. And there is no company out there in the United States. None. Not one that has got the optionality, when you deal with these critical materials as Energy Fuels, with the mill and the Vanadium and the potential for us to be, we believe, commercially producing Rare Earth concentrate in the quite near term.

It’s a lot of these indirects. But that a lot of the people that have been supporting the Nuclear Working Group and the production of nuclear products in the United States, when they see that White Mesa Mill could have multiple uses in the critical area they’re delighted. They’re actually delighted to know that.

Matthew Gordon: For people who are new to this, you’re talking about the White Mesa Mill, which you control. And it’s the only mill in the district which actually can cope with Uranium, Vanadium and Rare Earths.

And before we skip away from the RSA, the Russian Suspension Agreement, the date is 31st of December, end of this year. A decision needs to be announced. or any time between now. Have you heard anything about what is being discussed? Are they going to come up with a decision anytime soon or are they going to leave it to the last minute? And if so, what type of deal do you think we are going to see as a result?

Mark Chalmers That’s the big question. Look, there is, and I can’t go into details because a number of people that are participating can only go into so much detail, but I can say this: there is a push by the government to reduce quantities of Uranium coming into the United States, where there is a push by the Russians and the utilities to increase the quantities of a Uranium coming into the United States. So those are completely, oppositely opposed. Okay. And that is a rub. And as I said earlier, the Nuclear Fuel Working Group report says that we shouldn’t be increasing or dependency on Russia. There was a preliminary administrative review that was completed a month or so ago by the Department of Commerce, and they basically said that the conclusion of this agreement, what has largely been  gained by some of these people that want more Uranium coming into the United States, and  that shook up the utilities and it should shake up the utilities and the Russians.

It is moving forward.  it is a high priority for the government.  it’s a high priority for all the stakeholders in those renegotiations and negotiations. But I will say: watch this space, because it is probably, well, without a doubt, getting the most attention, in my opinion right now in the, in the Uranium space globally. And  that the preliminary administrative review that said that even though the agreement that’s in place right now was, people were abiding by it, the fact that it was expiring and that a number of utilities and the Russians were over-contracting greater than the 20%, is creating some ripples in the water right now.

Matthew Gordon: You say watch this space. Do you mean watch this space in terms of timing? Do you think it’s imminent? Or watch this space because you think the terms will change.

Mark Chalmers: Well, look, the deadline is the end of this year, 31st of December, 2020, but the administrative review process is ongoing and it was supposed to, I believe, terminate in early August, and now that’s been extended by another couple months. It’s just very much in the works right now. And, the outcomes are not certain, but it is getting a lot of attention. And, there’s really 2 camps:  to reduce the quantities coming into the United States or increasing the quantities, and the Nuclear Fuel Working Group is basically saying it shouldn’t be increased. It should be extended or decreased. These are the kinds of things that indirectly are pieces to the puzzle, that we were very much drivers of, as Energy Fuels, and it is helping us right now on other fronts that are less transparent because of the nature of the negotiations.

Matthew Gordon: But it is now also apparent the battle you are fighting, because you’ve got an argument of national security; critical minerals to the US, being self-sufficient, which is one position. And the other position, where one of the parties in all of this was not aligned and that’s the utilities, taking a commercial decision, and you would argue short-sightedly, because they wanted the cheapest possible product. They want more of this, more and cheaper, for longer. So that was the battle that you were fighting. And these guys had big, deep pockets in terms of their lobbyists. That seems to me a big part of what was going on and all of this.

Mark Chalmers: We have very good relationships with many of the utilities and I’ve delivered Uranium to many of them for decades. But yes, the utilities are looking at cost and they are trying to manage their businesses as they have to. So, that for a small company like Energy Fuels, and the Uranium industry, because it’s not just Energy Fuels fighting this battle, but mainly Energy Fuels has taken the biggest position, in pushing it forward. We have, as I’ve always used that phrase of, we punched above our weight. These utilities are very significant organisations with multiples and multiples of billions of revenue per year. So that’s why I said, we’re going to keep pushing on all those fronts. We’re not going to give up. We are not going to give up. But at the same time, we’re going to manage our business based on the market fundamentals.

Matthew Gordon: Big discussion. Lots of unknowns: timing is, well we know that there is a stop date at the end of this year for the RSA, and that seems a big moment for utilities, as is the US election, and that’s another big moment. And I know that there’s a consensus that nuclear is part of the solution for both sides of the house, but the Democrats a little bit less so than the Republicans,  I’m hearing from you. So even the utilities will be wanting to understand what the outcome of that election is, but that then has an impact on timing because the dust doesn’t usually settle from a US election until February, March, and then maybe there’s a shakeup, even if the incumbents stay in. So, what does that do for timing around utilities’ decision-making, term contracts, et cetera, how do you feel about that?

Mark Chalmers: When you look at it, there’s a lot of uncertainty, and uncertainty is uncertainty. So we’re preparing ourselves for any eventuality. We did pay down half of our convertible debt and we’re looking at the other half on how to best address that. We’re increasing our inventories. But we do think that, there’s uncertainty, but that if there’s an administration change, they are talking more negatively about hydrocarbons than they are nuclear, and to a certain extent that is supportive of nuclear as being important to get to zero carbon emissions. So, I don’t want to speculate, over speculate here, Matt. But you’ve seen over time that we are a company that positions ourselves aggressively but not recklessly when it comes to the overall picture of the company and we will be the survivor or one of the survivors in this space because of the way we manage the company now and going forward.

Matthew Gordon: And so one last macro point. So you producers. You’re a producer, right? The largest in the US. The Cameco’s of this world, and even the Kazatomproms of this world; you have relationships with utilities all around the world, and you can’t bad mouth them. You’ve got relationships, professional relationships with these guys, but it’s been a deeply frustrating process for all producers for the last couple of years, has it not? To have this fight, this debate around pricing. You need a certain price to be able to get back into production and you need to be incentivised to do so. So, going back to the question, which is, what do you think the timing is for what utilities recognising that if they don’t push the button soon, you guys aren’t going to be able to get back into production and give them the pounds that they need when they want it?

Mark Chalmers: Yes, those are the trade-offs. And some of the utilities understand that and appreciate that. Some of the utilities don’t think that total dependence on the Russians is fine. Even companies like Cameco. Some think, ‘well, we’ll be totally dependent on our allies, and we have no Uranium production in Canada right now’. The production is dwindling in Australia with the shutdown of Ranger; well, it will be at the beginning of 2021. So, the Western world, that’s the clash. It really is the state-owned enterprises vs the Western world – that’s the clash. You need higher prices, substantially higher prices for the entire world, including the Western world to continue to survive in the Uranium industry. Some of the state-owned enterprises may be a little less so, even though a lot of them are not as a low-cost is people want to think. So that that’s the clash. Do you want a diverse supply chain, or do you just want to get all your products at state-owned prices? So, yes, that’s the uncertainty there.

Matthew Gordon: Let’s talk about something you just mentioned, which is, obviously you’ve partly paid down the convertible which is due at the end of this year. You paid down some USD$10.4M, USD$10.3M. You have got the same  due at the end of the year. So why did you go early on the payment and what are you going to do about the end of the year payment?

Mark Chalmers: We wanted to show the market that we were managing that convertible debt, and that was about $10M Canadian. And we thought it was a prudent step to pay half of it. We are still looking at how to best address the other half. We have the ability to convert that into shares. And it’s like a 20-days VWAP at about a 5% discount at the end of the year, if we elect to do that or pay it off in cash. But, Matt, I’ve told you; having been in this business over 40-years, I’ve seen these companies get in trouble because of debt on a number of occasions. And that is an area that is close to my heart, to not get over-leveraged on debt. And at the same time, there are a number of the Uranium guys that are taking on more convertible debt, and we’re going the opposite direction, which is a differentiator. No one else that I know of in our space has actually been paying off debt. They have been taking on more debt as they go forward. So, watch it. We will pick our moment and we will address the debt no later than the end of the year, maybe sooner. But we want to make sure that we do it on our terms

Matthew Gordon: Is selling down some of your inventory a possibility? Because looking at the numbers, if you’ve got about USD$21M to USD$23M worth of Uranium, you’ve got about USD$8M to USD$9M of Vanadium. I know the prices are low, but if needs must, would you consider selling that down?

Mark Chalmers: Anything is possible. We like holding the inventory because we think the market is poised to reward us for having that inventory. By the end of this year, we’ll have in the order of close to 700,000lbs of inventory close. So, it’s our objective not to sell the inventory down until the prices are at higher levels. Yes, look, there’s a number of ways to address the debt, but we would really like to see the continued increases in Uranium and Vanadium prices, particularly Uranium prices to get a bigger lift out of the out of that inventory.

Matthew Gordon: Do you think it would be cheaper to refinance your debt rather than pay it off or sell off inventory? Because the upside on inventory could be more significant?

Mark Chalmers: The inventory we carry, it is the like, for Uranium, it is like USD$23/lbs, and currently price is around USD$33/lbs. That is how we carry it on our books for counting purposes. So, we’ve got about a $10/lbs lift you just on the Uranium price itself. That’s material to us. We think there is more upside for inventory than downside. You don’t get any money in your accounts, any more interest bearing on your account, so we’re pretty comfortable having this inventory that we can liquidate quite quickly if we need to when the time is right.

Matthew Gordon: But there’s some good news, Mark. I’ve solved your problem because I’ve spoken to, for cashflow, I have spoken to 5 companies who are going to be tolling through your mill, which is great news.

Mark Chalmers: Yes. That’s very interesting news because none of them have called us to ask us about that.

Matthew Gordon: Oh.

Mark Chalmers: It seems like every week I see another, press release or something that shows a picture of our mill and they didn’t even ask permission to use the picture of the mill. I need to clean this up because it is not right for people to just assume that they are going to have access to the mill, because they don’t have access to the mill. We have no milling agreements at this point in time. In the event that we do decide we’re going to give, we probably won’t give out a milling agreement, we will announce that, but for all of our investors or any investors in any of these other companies, no one has access to the mill except for Energy Fuels. So yes, it’s amazing how they all chime in and show pictures of the mill and how it’s close by, inferring that they have access to it, but they don’t.

Matthew Gordon: I just wanted to put that to you, because you’ve spoken to it least a couple of times before, you’ve been very clear with me, but we keep seeing it, and I just wanted to give you the chance to respond. And that’s the most direct you have been with us, so I do appreciate that as well. One more thing, if I may. The other thing that is happening is there is a lot of Australian ASX-listed juniors coming and picking up Uranium assets in the US, and they’re getting funded. They are raising money off the back of this. Why haven’t all of these Uranium assets in the US been picked up before?

Mark Chalmers: Well, there is a lot of Uranium assets in the United States and a lot of these properties that people are picking up, they’re not permitted. Now there may be 1 or 2 that are permitted, but a lot of them are not permitted. And over the last 20-years or so in our case, we’ve picked up… well, many of our projects are permitted, have a long-term production history and recent production histories, there’s only so much space in the market. Getting permits is very, very difficult. And there are other companies that do have some permitted assets. I don’t know. To pick up unpermitted assets, to not having access to the mill, very speculative investments. They have been raising money on it. And frankly, a lot of projects on the Colorado Plateau are of lesser risk and probably easier to get to market than a lot of these other Uranium deposits that some people are promoting outside of the United States. There’s a long production history in the US. So there’s different investment risks for different groups of investors. So, just, all I would say is people need to know what they are investing in. If they are comfortable with that, that’s fine. That’s their choice.

Matthew Gordon: It is always their choice. Why didn’t you pick them up?

Mark Chalmers: We don’t need any more assets. We have assets in about what?- 6 or 7 different States. Most of our assets are permitted. Most of them recently had been worked and the underground workings are in good shape. The mill has been operable. Nickel’s ranch has been operable. Alta Mesa. So, we don’t need to own the Western United States. It is costly and there’s a point where, it just makes absolutely no sense to have more assets.

Matthew Gordon: “Some questions sent in: wouldn’t it make sense for Energy Fuels to now step in as a buyer. They need ore at the White Mesa mill. They want Uranium, they want Vanadium. The Sunday mine complex is basically next door. This might be a fun ride going forward.” Any plans?

Mark Chalmers: I’m not going to say we are not going to buy Uranium in the future, because that’s the history of the district. But to put it in to perspective, over the last 10 or 15-years there have been times when we have had milling agreements and we have perhaps bought some ore from people, but it turned out to be just a very small percentage of the production that came out of White Mesa mill. And I don’t know the exact number, but probably in the order of maybe 10% of the production that came out of White Mesa came from other mine that were not owned by our company. So now look, that that can be variable, but the reason why we haven’t paid a lot of attention to this market is, 1) the prices are too low, and 2) historically other people may have, the aspirations of becoming producers, but very few can actually really contribute in a material way in the mill. Now, the price Uranium is USD$75/lbs or something like that, that could change to some extent, but we already have a number of mines ready to go, that we have operated within the last year. And these mines that were mined 30, 40-years ago, and nobody has mined them since; I hate to think of the condition they’re in.

Matthew Gordon: Is that a no?

Mark Chalmers: So, look, we still control the district with our White Mesa mill, 100% owned. And that’s because we have spent the money to keep it in good working order over all these years. Anyone who wants to build another mill, they can go out and get the permits and construct another mill for several hundred million dollars. That is always open to the realm of possibilities.

Matthew Gordon: So that a ‘no plans anytime soon to go and have a conversation around M&A with Western Uranium and Vanadium?’

Mark Chalmers: Well, it’s subject to change: if, for example, if the US government decided, or the price of Uranium increases to a level where it’s economic to have those discussions, I’m not saying we’re not going to have those discussions because if we can get material into the mill and that helps us, we’re not going to,why would we turn our head to that? We will not turn our head to that, but I’m just saying that right now we have no agreements with anyone. Still, no one should just assume they have access to the mill right now. They should not assume that. And, but things can change. And we are absolutely in the driver’s position with the mill. And the material from our projects will take first priority over anybody else’s material.

Matthew Gordon: Mark. Good catch up. Thank you very much for that.

Mark Chalmers: We didn’t talk much about the Rare Earths.

Matthew Gordon: Oh, yes. Sorry, you’re right. Let’s do it.

Mark Chalmers: It’s a great spot for us, Matt, and a huge differentiator. So we’re still advancing our efforts on the Rare Earths. I hope to have more news flow on that front in the coming months. It has by no means gone away. People that I know say, ‘Oh, they’ll never do anything there’. I tell them – they are full of baloney. We’re going to do things in the Rare Earths space. And, it is certainly getting a lot of attention, it certainly has by-partisan support, the Rare Earths and the dependency on China. So, all I can say is, watch this space. But we are advancing things, but we can only unveil things as we close them out. But we’re still testing material at White Mesa and we’re getting a lot of interest in it.

And so if you talk to people in the Rare Earth sector, those that know about what we are doing and our aspirations you’ll find that many of them will say that we are in a very unique spot here. Very unique spot. The market is recognising that right now.

Matthew Gordon: And I have got to ask you, only because I’m so pleased at the way I can pronounce this, which is, how our discussions with Constantine Karayannopoulos?

Mark Chalmers: Well Constantine is an advisor to us. He just recently went from non-executive chairman to CEO of Neo Performance Materials, that’s a company that he founded and developed back in what, 25-years ago? Constantine and I talk on a routine basis, and Brock O’Kelly, and so we’ve got a very good relationship with those 2 gentlemen, and both of them worked for Mountain Pass and Moly Corp. And if you saw, Mountain Pass Materials announced that they’re going to list a USD$1.5Bn Rare Earths company on the Mountain Pass deposit and operations. And that, that got some attention in the market, and that’s why that we’re not getting any differentiated value with our peers in the Uranium space, but then we have this. What I consider a very significant opportunity in the Rare Earth space and still be able to recover Uranium from those streams.

So, basically what we’re proposing to do is exactly what CNNC is doing in China right now; trading monocyte streams of material, recovering the Uranium and going through the stream of further downstream Rare Earth processing. And White Mesa is the only other facility that I know of in the world, outside of that facility that can do effectively the same thing in given some time. So, watch it, watch it. And I am extremely excited about this, and this is one of the best opportunities I’ve seen in my entire career in the Rare Earth space and how it blends in with Energy Fuels, so watch it.

Matthew Gordon: We will, we will watch it. We are excited by it. We have spoken to enough Rare Earth companies. We know the restrictions that they have around processing outside of China. So, I do get that. I’m eager to see what does happen over the next few months, this side of Christmas, hopefully, in terms of how you are moving that one forward and who you are having those conversations with. So, keep us up to date. Pick up the phone like you always do.

Mark Chalmers: We will keep you up to date. And as I have always said, yes, some exciting times ahead. It’s a tough business, but you have got to know how to navigate it. And I won’t say that I know exactly how to navigate it at all times, but after over 40-years in this business you got to be tough. You have got to be tenacious. And you have got to be aggressive, but not reckless.

Company Website: https://www.energyfuels.com/

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Canada Nickel (TSX-V: CNC) – Tesla Wants Clean Nickel – NetZero Nickel (Transcript)

Canada Nickel Co Inc.
  • TSX-V: CNC
  • Shares Outstanding: 57M
  • Share price C$0.92 (02.07.2020)
  • Market Cap: C$52M

Interview with Mark Selby, CEO of Canada Nickel (TSX-V: CNC)

FULL ARTICLE FOR THIS INTERVIEW AVAILABLE HERE.

Now, here’s something that some nickel commentators know about, but very few of them seem to talk about.

Let’s talk about ‘Clean Nickel & Dirty Nickel’. Elon Musk wants nickel. he wants it efficient and clean. large funds are bound to follow this lead. As will other automotive manufacturers.

Not all nickel is equal. We’ve discussed at length the advantages of disadvantages of nickel sulphide and nickel laterite, with both possessing different costs: high-cost mining (sulphide), low-cost mining (laterite), high-cost processing (laterite – +US$1Bn HPAL projects) and low-cost processing (sulphide – simple smelting). https://cruxinvestor.com/opinions/class-1-class-2-why-does-it-matter-for-investors/

However, the element that many are forgetting to this story regards the environmental footprint of nickel sulphide and nickel laterite; are laterite projects dirty? Is this a complete game-changer in the wake of Elon Musk’s quarterly conference call requesting that nickel miners produce as much green, efficient and sustainable nickel as possible?

We Discuss:

  1. 2:20 – NetZero Metals Inc: An Overview
  2. 5:30 – Environmental and Sustainable: Problems of Mining
  3. 7:10 – Sulphide vs Laterite: Which Gets Funded First?
  4. 9:29 – NetZero Mission and Plan
  5. 11:13 – Supporters of NetZero: Benefits to the Market
  6. 12:17 – A Distraction from Canada Nickel’s Goals?
  7. 15:37 – Difficulties to Come: Might Big Companies Retaliate?

CLICK HERE to watch the full interview.

Matthew Gordon: Mark Selby. How are you, sir?

Mark Selby: Good. Thanks, Mr. Gordon. How are you?

Matthew Gordon: It feels like only yesterday we spoke, but that was I suspect that was our Nickel insight weekly session.

Mark Selby: There you go. The weeks do merge together these days when you’re at home with COVID.

Matthew Gordon: They do roll on. But today we are talking to you with your Canada Nickel Corporation hat on, because I saw your press release, you are talking about NetZero Metals. What is it? Is it some gimmick?

Mark Selby: No, we have had this in the works for the last few months. What we realised is, we’re in a pretty unique position where we have the rocks that make up 90% of a deposit actually, naturally absorb CO2 when exposed to air. We are in a region where all the electricity is hydroelectric power. Any electricity that you use in the mining process is zero carbon. And we are in an area that actually has a long history of doing downstream processing in the region, so we can actually build a downstream processing plant, which is often where a lot of these emissions are generated. We are going to take advantage of the fact that our waste rock and tailings should be able to soak up that CO2. When you step back and look at it, you go, ‘Oh, okay. What?’ We can actually deliver zero-carbon materials, zero-carbon Nickel, zero-carbon Cobalt and zero-carbon Iron. And, Mr. Musk’s tweet last night, not last night, last week, really drove that home in terms of they need environmentally sensitive Nickel, and it’s not a 2050 issue. It’s a today issue.

Matthew Gordon: I need to dig deeper than that because those factors have always been there in your project – why now? What attention are you trying to draw? Is it just trying to draw attention to Canada Nickel Corp? Or is there something bigger to it than this?

Mark Selby: I think, at the end of the day… in a past life, we realised that Dumont could be that, so now that I’m running my own show, realising that, yes, this is possible and to step back, and really, this is the thing the mining industry should be doing. I think what the industry needs to realise is there’s an ever larger number of people who are your consumers who look at Co2 emissions in the same way that we did looking back in the 1970s and 1980s when a lot of mining companies and industrial companies in general used to think, ‘Oh, just dump the gas in the air, dump the liquid waste down the stream. That’s great, we’ve got a stream, that’ll just carry it away for us. We don’t have to worry about it.’ And we look back and we think all that was so horrible, but there’s a whole new group of consumers who are looking at the Co2 emissions that our industry is involved with, not just generating ourselves, but the products that we make, and we really need to find solutions to generate the zero-carbon products that these consumers and the market wants and needs.

Matthew Gordon: Elon Musk came up that statement last week, and that’s had a massive effect on the price of Nickel, your share price, and it has got people’s attention, looking towards Nickel. But you have got a Nickel Sulphide project. We have talked in some of our weekly insights sessions around laterites, and we have done one show on dirty Nickel. So he’s helped people understand that he will invest in Nickel projects if they are sustainable, if they are done in an environmentally friendly way. Aren’t they all environmentally friendly,  as far as mining goes?

Mark Selby: No, that’s the big thing, we alluded to it in different things. Nickel has a dirty Nickel issue in that the bulk of the growth over the last five years and where the bulk of the growth going is going forward, has come from Nickel pig iron projects in Indonesia, and to make Ferro-Nickel, to make Nickel pig iron, you use a huge amount of electricity and all those projects are using coal-fired electricity that degenerate it all. Each one of those projects is using somewhere in the order of 25t to 30t of coal to make 1t of Nickel. That in turn is 90t of Co2 emissions per ton of Nickel. So all of a sudden you take 50kg of that  Nickel that’s related to that and all of a sudden, you’re strapping 4t of steel to a Tesla that’s got 50kg of Nickel under the bottom, I’m not sure that’s what Elon Musk had in mind when he was,  wanting to build Tesla to  change our impact on the environment. And, consumers don’t want to buy a car and end up having a whole pile of CO2 that comes along with it. The fact that that’s where he went to immediately after saying we need as much as we can, as soon as we can, is really, that is a fundamental issue for them, that they just can’t get enough clean Nickel to meet their objectives.

Matthew Gordon: Basically, Indonesians, Chinese, they don’t care. They can get funding wherever. What about laterite projects outside of those jurisdictions? Do you think that they are going to find it just that little bit harder to get funding, or do the big institutions and funds not mind? And they are really just concerned about the bottom line?

Mark Selby: Well, the coal-based Ferro-Nickel projects in general are going to really struggle here because, not only on an economics perspective, you’re now competing with these massive facilities that are being built in Indonesia. Your project itself is at a disadvantage scale-wise to these businesses. You now, if you’re using coal in the rest of the world to generate your Nickel, if the Indonesians are going to dominate the Chinese market, and you’re left supplying your product to the rest of the world, are you going to have a market there when you either have to start paying for the carbon that you’re generating? Or whether people will say, ‘no, as long as I have an alternative that’s zero or lower carbon, I’m not interested’.

There are Ferro-Nickel projects that do have access to hydroelectric power or access to natural gas so those, obviously, have a much lower environmental footprint than the coal-based powers. But, those are the design choices people are going to have to make in terms of the projects that they choose to fund going forward.

Matthew Gordon: Who gets financed first – Sulphide projects or Laterite projects?

Mark Selby: Sulphide projects, particularly the ones that have the benefits that we do at Crawford, where you have these rocks that do absorb CO2. And, I encourage people… there’s a whole pile of research on carbon sequestration using serpentine rock-based systems. They are actually looking at injecting CO2 into solid rock, as opposed to just using the tailings and the waste rock that are leftover. It’s a real solution. I think increasingly as we move forward here there’s going to be much more capital available to those projects that are able to deliver a zero carbon or low carbon versus those projects that generate 90t of carbon for every ton of Nickel that gets produced.

Matthew Gordon: But what are you trying to do here? Because not only have you announced a wholly-owned subsidiary – NetZero Metals, but you have also applied for trademarks. Are you trying to get investors more aware of specific issues, or is this just for your own benefit?

Mark Selby: We’ve been talking now about carbon for several decades, and several decades in, industry still hasn’t managed to do it. If you look at most of the larger resource companies they have got, ‘By 2050, we’re going to be net carbon neutral,’ That’s 30-years from now, and that’s a lot of carbon between now and then. And this year we changed all the light bulbs in the office to be LED lights, but fundamentally they are making iron ore and coal that go to make steel that are going to generate several tons of carbon for every ton of product that they are shipping out. It’s time for those large companies to look themselves in the face and say, ‘okay, how do we, as an industry, find end-solutions to be able to deliver zero carbon production?’

We’re talking, we are going to build downstream, look to build downstream facilities in the area next to this mine, because, the off gas from these processing plants is the issue and we’ll have an ability to take that off gas and route it through the tailings and waste rock and make that carbon issue disappear. Other companies should be thinking about that and should be able to do, should be looking for those opportunities to do it as opposed to, we’re going to get to it in 20 or 30-years.

Matthew Gordon: Have you got any other supporters here? Because I suspect that the BlackRock and Fidelities of this world who are changing their investment criteria, would be interested, if they understood this. Are you going to take this forward? Are you going to be the champion for this?

Mark Selby: Yes, one of the things we talk about in the release is leadership changes, so we really want to target mining. It’s about getting the right people. It’s about finding the right deposits. And it’s about competing for capital in a way that allows you to have ‘the best capital and the lowest cost capital, the most patient capital’ and so forth. So if this initiative allows us to tap into a much broader range of networks to be able to get those type of investors, and you’re going to see changes at our board level where we are going to start to bring in people who have those types of relationships and who have that  experience. So that, we really are going to take this as a new concept to a much broader audience, and, hopefully win versus the other competing mining projects in this space.

Matthew Gordon: Why do you say that’s a positive? Isn’t this going to be distracting for your main task, which is to get your project up and running?

Mark Selby: No, from a mining perspective, it’s about A) – getting the right people. B) getting the right asset, and C) getting the right capital. You need to focus on all 3. Too many mining companies just get caught up in the technical and not really focused enough on the people and on the capital part of it. I would encourage people to listen to Tesla’s last conference call because every topic they came to was around talent; we need more of these types of people. We need more of these types of people. If you’re an entrepreneurial actuary we want you to come help us build an insurance business. So that’s the mindset that we need to have, and this is a stake in the ground in terms of, this is going to be a major thrust of where we’re headed.  We have trademarked these terms because we are first. They don’t exist today. And then in terms of creating a separate entity, because , I’ve been talking to the people in the EV chain now for the last three or four years, and it’s clear on 2 fronts: 1) – they are not as interested in deploying capital to the mining side of the business, but oh boy, do they want as much Nickel and Cobalt as you can produce and preferably double and quadruple your production as quickly as possible, please. And we will help you build a processing plant and we will promise to buy everything you produce. By creating a separate subsidiary right out of the gate, it makes it a much easier conversation, a simpler conversation to get those companies into that specific entity.

The other fundamental piece of this, and, so many companies to date have got this so, so wrong, 2) is the auto industry wants to make the lowest-cost product possible, Elon Musk makes it very clear. That’s how they are going to win. And so you need to look from an end to end perspective of what’s the lowest cost way to get a chunk of Nickel out of the ground and into a battery that isn’t a Tesla and the other 18 large automakers who are going to be betting the farm now on the electrification of cars. And so when you look at that, the key is, as you take a Nickel intermediate that’s as high-grade, as clean as possible, and you dissolve it once and then you basically keep it in one set of processes until it’s like in a can that’s ready to ship to a plant. These people who have built standalone sulphate plants are crazy because to take the sulphate, the Nickel that’s in solution, you spend a huge amount of energy to crystallise it, to put it in a bag or a drum, and then that bag or drum goes to a plant that starts to make batteries. And the first thing they do is dissolve it all. I can spend 15-minutes on why that’s not a good idea. All of these companies that we have been talking to are very keen at basically putting as much of the one process under one roof. They do everything once and only once until they get to a product that’s the right thing to ship at that point in time.

Matthew Gordon: That’s hard to put together. What’s even harder is getting the old boys in the industry to back something like this, because what you’re proposing is potentially going to cost them billions and billions of dollars on infrastructure to get clean.

Mark Selby: Oh, no. If you’re making iron ore it’s like, well, okay, well we just ship iron ore. That’s our business. If it all ends up in China, and China pumps out billions of tons of CO2 in the process of making that, we’re not going to build a steel plant next to a hydroelectric facility or in a place where there is some solar or wind, so you have a chance of having cheap hydro available or using natural gas involved in the reduction of it. Or look at complete hydrogen reduction of that process, so that there’s no carbon involved, and/or strapping on some carbon capture at the end of that process. So that if there is carbon that’s produced, you’re able to capture it so it’s not released into the environment.

Matthew Gordon: Well it’s exciting times, and the whole NetZero initiative. Exciting for you. Keep us up to date with how things are moving along.

Mark Selby: Yes. Most definitely.

Company Website: https://canadanickel.com/

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Brandon Munro #17 – US Utilities Want Russian Uranium (Transcript)

Bannerman Resources Ltd.
  • ASX: BMN
  • Shares Outstanding: 1.06B
  • Share price A$0.035 (16.07.2020)
  • Market Cap: A$37.06M

Uranium Market Commentator & Bannerman Resources (ASX: BMN) CEO, Brandon Munro, calls in for our weekly catch up about the world of Uranium and Uranium investing.

Based on questions that were sent in by viewers, it is clear that there are a lot of new investors coming into the uranium ecosystem. So Brandon and i cover a little bit of old ground but with new data. We start with the relationship between spot price and term-contract in today’s environment. We also look at the effect of supply and the effect on Russia v US tensions. Does Russia care about the Russian Suspension Agreement. Should they?

And we get his thoughts on the timing of the US utilities coming back in to the market to help drive equities. Are US uranium juniors without a cash buffer getting nervous.

We Discuss:

  1. 3:22 – How is Spot Price Determined
  2. 6:49 – Relationship Between Term Contracts and Spot Price
  3. 10:43 – Importance of Kazakhstan: How Long Can They Withhold Production
  4. 14:57 – Utilities Globally: How Do They Work?
  5. 19:49 – RSA: Why Should Russia Care About the US Market?

CLICK HERE to watch the full interview.

Matthew Gordon: Brandon Munro – how are you doing, sir?

Brandon Munro: I’m well, how are you, Matt?

Matthew Gordon: All good, well actually, I am not all good; my 12-year-old took me swimming for non-stop lengths of the pool, then made me tread water for 5-minutes, then made me do pull ups and I can barely move. I am incapacitated like the old man that I am, and I can’t sleep. So that’s me. Woe is me.

Brandon Munro: Oh, geez. That’s tough. Were you able to do the pull ups all on your own or did you need to get pushed a little bit?

Matthew Gordon: the problem was I did do them on my own and I’ve literally just ruined my back. That was 3-days ago. Too old. I’m too old. Let’s get into something I can manage, which is asking questions. It’s another week in the world of Uranium and this week we would change it up a bit. We have got loads questions coming in every week, which people want to put to you. We have put some down on paper at some broad headings. we might do some more next week because there’s a lot, even if we do consolidate them to broad headings. You’re ready for this? You’re okay?

Brandon Munro: Yes. Sounds exciting to me.

Matthew Gordon: I’m going to start with an easy one, which we have covered off in the early days, but there’s some people who don’t necessarily have time to go back through the series, but let’s just talk about an easy amuse-bouche for you, which is, ‘how is spot price determined?’

Brandon Munro: Okay, well that is a nice warmup one, isn’t it? The first thing to understand is that it is not like a clearing house spot price that we see in certain other metals. It is a reported spot price. So there’s a handful of reporters, and the best known of them are TradeTech and UX Consulting, and what they do is they basically keep their finger on the pulse in the best way that they can to understand who is buying what, in what volumes at what price. The first limitation is it’s not going through a clearing house or an exchange. There is some capacity for partial accuracy. And that has been improved. It’s been improved first of all, because there is a quoted futures exchange, which gives, a more accessible level of information to investors. And that’s a NYMEX futures exchange, which you can look up, say on bar chart.com.

And then the other thing is we have seen the emergence of traders who are very transparent, such as Numerco. So well-worth looking up Numerco, following them on Twitter, and they have really had a positive impact on that level of transparency.

The second thing to understand about the spot market is it’s not an immediate delivery market. In fact, spot can be anything up to 12-months delivery and it’s still categorised that way. So that is much to the irritation of some of the larger producers, the Cameco’s, KazAtomProm’s, for example, who want to move this market to a more realistic, immediate delivery or short-term delivery market. The other thing to understand is, as investors we see the price, but it does differ depending on the delivery point. The spot, or the price that’s quoted for say two-week delivery at Cameco might be different to the price that’s quoted for 2-week delivery at COMERX, for example, or in the US. And we have seen that play a big role just recently because of a disruption in both conversion and Uranium coming out of COVID, we have seen a lack of storage capacity at COMMEREX in France, and so a very big swing between what is being paid for delivery in Cameco, the Blind River and COMEREX in France. Normally the location swaps in this sector have been very, very fine, but that’s now changed, temporarily, no doubt, but that’s a big swing and a big arbitrage if people are able to move material, move in the sense of the location swap at the moment. They are the key downsides of what we have got at the moment we spot. It’s lack of accurate transparency. It’s a multitude of different delivery forms and locations.

Matthew Gordon: For people coming into Uranium, investors coming into the Uranium space and looking at it as a potential investment, that’s the first thing they look at. They think of, like other commodities, you look at the spot price and that determines the market. Once you move slightly further up that knowledge curve, you start to appreciate that. And in fact, term contracting with long-term contracts have a more significant role to play. Let’s just try and understand, if you may, the relationship between spot and term-contracts.

Brandon Munro: Yes, very good question. Particularly for people coming new into the sector Traditionally, this business was done almost entirely on long-term contracts between the utilities and the big producers. And that situation continued well into 2004, 2005. And the spot market such as it was, was really used for settling, say, overproduction by a mine that couldn’t be delivered into contracts or sometimes buying back production if there was a disruption or for some reason they had oversold who got over called on the production limits in their contracts. Now what happened in the last Uranium boom is financial players came into the sector. There was a huge increase in volume generally, and that made the spot market fulfil a number of other functions, not just that form of settlement of overs & unders, under contracts.

Then what we saw after Fukushima was a sustained period of low contracting, relatively speaking, and much higher spot volumes. So, instead of spot accounting for say 5% to 10% of the movement of material in the market in some years it’s been as high as 50%. We have seen an increased role of traders; there’s the concept of churn in that spot market. It’s not necessarily one pound being pulled out of a mine and sold to a utility, but that pound can be churned many, many times to create additional volume. But what we have also seen is the emergence, in particular of Kazakh production, a fair of which went into the spot market until fairly recently. So that’s important to understand, as well as you’re taking a little bit of an introductory trip into this sector, the important news is Kazakhstan has stopped selling into spot. They haven’t sold into spot since, the beginning of 2018. So no longer is there that pressure. And if we now bring that right back to a contemporary setting, one of the impacts of the COVID disruption in Kazakhstan is that at least one of the, let’s call it major culprits who sell their mined material into the spot market, derive the majority of that material from their joint venture in Kazakhstan with KazAtomProm. So even though KazAtomProm, isn’t selling into spot, their joint venture partner was.

So what we’re likely to see coming out of COVID disruption is both an increased demand, particularly if KazAtomProm is forced into the spot market to compete with Cameco and other producers, but also a lot of the supply will be cut off at the needs because those parties who traditionally sold their joint venture material into the spot market can no longer do that.

So, term contracts, whilst there’s a low relative volume of term contracts at the moment, they are such an important part of the risk mitigation and supply security that utilities rely on in this business, that they will come back. Spot probably won’t go into the dormancy that it was in the 2000, but its relative position will reduce as the importance of term contracting increases.

Matthew Gordon: Let’s move further up that knowledge curve. We talked last week at length, and possibly the week before actually, about the importance of Kazakhstan and KazAtomProm to the Uranium market. Kazakhstan represents about 40% of production globally. KazAtomProm has 24% of that. They occupy almost the entire bottom quartile of the cost curve there. They are very, very important. People new coming into this, recognising that some of the questions we have had are how much longer can KazAtomProm hold off from getting into production; either forced or unforced, and how can they mitigate that?

Brandon Munro: Okay, so let’s be clear on what we’re talking about: KazAtomProm and Kazakh production is still continuing and that’s because before their 7th April announcement that they were needing to curtail activities, they’d already done wellhead development and acidified their in-situ recovery wells. The acid that they pumped in in January, February, March for example, is still producing Uranium today. It is starting to deplete. It’s becoming less potent, if we can put it that way, but nonetheless, they are still bringing solution up to the surface and extracting Uranium. What we’re really talking about here is not production per se, but their ability to start again with the drilling of these extraction wells and the pumping of the acid in so that they can allow it to acidify the ore and start bringing that solution up. And finally, the point to understand here is, there could be a gap where the current production from January, February, March acidification tapers off to such an extent that there is effectively a full, a significant or majority break in production.

To answer your question, you’re working in scenarios always with this type of thing. What cause KazAtomProm have said publicly is that they will start slowly to recommence wellhead development from the beginning of August. And now we are all waiting for their third August quarterly update, because in the meantime, and since they gave that guidance, the lockdowns in Kazakhstan have been extended and there’s an awful lot of commentary and news flow coming out of Kazakhstan that things will get extended again, but be that as it may let’s work with what’s in the public domain right now. That wellhead development will be slowly reinitiated from August. I read that, to me, that the most optimistic scenario we’re dealing with here is that they would spend, let’s say 4 to 6-weeks slowly mobilising, and the wellhead development itself, in the most optimistic scenario, would be running at full steam by, let’s say mid-September. That will then take some time, several weeks, and it’s not like they can play catch up across all of those different 13 mine sites. And then there’s a process of acidic acidification and in the optimistic scenario that would all take place before the winter sets in and then they would be back to normalised solution recovery by, let’s say November. And we would still see the dip in production because of that lag effect. And that dip would still carry on into 2021 to an extent. But you could probably realistically see them back to normal production levels by, let’s say the second quarter of 2021. That’s the most optimistic.

Matthew Gordon: Which answers the question that we were sent. That’s something that people are going to watch very, very closely: what will KazAtomProm do? What will Cameco do? The 2 big players in the marketplace.

Let’s move it forward. So, again, for all levels of ability watching this show, it is quite clear from the questions that are sent in, and we need to make sure that everyone is comfortable and learns with us. We’re all moving forward towards the same place. And the next question is around, now that we understand some of the players a lot of people are recognizing that US utilities are very important. They are important because they represent 25% of the world’s global demand for Uranium. And the question is: do different utilities from different countries have a propensity or a favouritism to go to certain countries. So, do the French utilities always look in Africa? Do the US utilities always favour Canada, for instance? How does it work when you are a utility buyer?

Brandon Munro: Well, the answer to that is one of those classic yes, and no answers: if we talk about the French, for example, Électricité de France is the world’s largest utility because it is responsible for a 75% of France’s total electricity demand. And so EDF have had a long-standing relationship in Niger, which has been effectively backed by the French government. It’s a bilateral relationship, not purely a commercial one. They have derived a large proportion of their Uranium from Niger, but they’re also in a joint venture in Kazakhstan. They have production coming of Canada in joint venture with Cameco. And because of their comfort in Niger, they have also been happy doing exploration and development work in Namibia, for example, as well as Australia and elsewhere.

And they have been rationalising in recent times, trying to reduce the expense of their Uranium business. And there were a couple of spectacular examples of that, but that’s a story to tell another day. Now, they do also have trading businesses. They do also buy and sell in the spot market and to contractors and with others and so on, but they are something of an outlier.

Then let’s look at China: the Chinese model is a lot closer to the Orano/EDF model. They are buying heavily in the market and they have been for quite a number of years, back all the way to 2006. They also have a strong preference to deal in Namibia, and that’s for a range of reasons that would include the preference that Western companies would have in Namibia. And also the fact that because of the extent of their investments in Namibia, they are obviously able to have a relationship with the local Namibian community and the Namibian government that gives them a lot of comfort.

And one Chinese utility, CNC has the Rossing Uranium mine, and a 25% interest in Langer-Heinrich, which is the Paladin energy mine that’s on care and maintenance, and the other Chinese utility CGN owns the Husab mine, that they paid USD$2.4Bn for from extract resources back in 2012. The 3rd Chinese nuclear utility, SPIC has not yet acquired a mine in Namibia, Africa or anywhere in the world.

They’re the 2 major outliers. Then you’ve got the US industry. And as you’ve said, they are important. They still comprise roughly 25% of Uranium demand around the world. What happened is back in the late seventies, early eighties, a few utilities clubbed together to buy mines and got their noses bruised and broken, doing that. US utilities buying mines and operating mines is not a very popular thing at the moment and it is a bit frowned upon. It’s all commercial relationships and they buy across the board. And that’s all publicly available. You can go to the EIA report that came out a couple of months ago. You can see that the US utilities buy from Canada. They buy from Australia, they buy from Namibia, they buy from Kazakhstan and they buy from Russia. And there is a propensity to buy it from closer allies, such as Canada and Australia, but there aren’t any explicit limits other than the Russian Suspension Agreement on how much Uranium they can buy from anyone else.

Matthew Gordon: Well, that leads nicely onto a topic we discussed last week and a few weeks ago as well, which is the RSA (Russian Suspension Agreement). We had Dustin Garrow on earlier this week. Very well-known character, a Uranium consultant to many in the industry. And he’s been around the block a few times and seen the highs and the lows. He was talking to us about the RSA agreement, that Russian Suspension agreement. And it’s a very important topic, which the US government is in the process of making some decisions on. And the expectation is that, well, you talked about this last week; the decision needs to be made before the end of the year because we’re not quite sure what will happen if they don’t.

He put a very interesting thought forward, which is, at the time that the Russian Suspension Agreement was put together, back in the 1990’s, it was a very different world. There were very different demands in terms of the volume of Uranium used. And that Russia felt the US market was a very important to get into, and obviously the US didn’t want them flooding the market either for a variety of reasons, national security being one of them. Dustin thought, or he put this forward, which was, why should Russia care now, in today’s environment, when there is a much bigger demand story, there are new markets why keep banging down the door of the US market?

Brandon Munro: Well, that is an interesting question. And Dustin is certainly the guy to come up with those questions, with have such a vast amount of experience in the industry, including back in the old days when there was a bifurcated market with Russian material and non-Russian material and what was allowed into the US and so on. He’s got some insights from those days that not many people have got anymore. Here’s the thing; first of all, the Rosatom group of companies are extremely effective in this industry. They build plants on time, on budget, all of the time. They are in every aspect of the nuclear fuel supply chain, and they do it well. And they pride themselves on their delivery. They would not want to be the instigators of any breach of supply. They wouldn’t call force majeure. They wouldn’t withdraw unilaterally or voluntarily, but Dustin’s question and comment probably goes more to the situation where they are not allowed into the market by US government or by negotiations between the US and Russia, and how would they react? And Dustin does make a good point in that for Rosatom to lose their access to the US market with their enrichment in particular, sure, it would be a shame for them, and it would affect them, but it wouldn’t be a disaster. Russia has got very significant demands on Uranium for both its domestic requirements, but also its export program. And if they were left in a hole with their capacity for enrichment or SWU, they could redirect that capacity at re-enriching tails and other forms of secondary supply that would still have a happy home in their Uranium requirements now and going forward. It wouldn’t be a disaster for them. It would have an impact, however, on US utilities and depending on how far you want to go down this in terms of geopolitical posturing and how much of a conspiratorial approach you want to take to this, it would have the effect of putting a splinter in the finger of the US nuclear fleet, because it would make their enrichment quite a bit more expensive. The utilities would then have to very quickly recover that enrichment from non-Russian sources and non-Chinese sources, and there isn’t an awful lot of that. It would have two effects on the Uranium market as well as increasing the utilities fuel costs and their efficiency of producing energy.

The first effect on the Uranium market is it would quite quickly absorb the excess capacity in the non-Russian enrichment sector, which means less underfeeding, which means less secondary supply of Uranium that can make it into the market. Now, the second effect that it would have is, let’s say that we saw spiralling SWU prices. SWU is a separative work unit, which is the way that enrichment is priced. A spiralling SWU price would create an incentive for not only underfeeding to stop, but if Uranium is still relatively cheap, what the US utilities could do is they could overfeed. In other words, they pay a lot less SWU and they buy a lot more U308 so that they can push a lot of U308 through at higher tails assays. And for people new to this, probably the best thing to do is to go back to some of our discussions where we really talk about the nuclear fuel process and the whole cycle as it relates to conversion and enrichment. But for everyone who’s not coming here for the first time, that could create a situation where we see increased demand from the US utilities, and in the timeframe that we’d be talking about, what that probably means is very accelerated draw down on existing inventory of U308 and UF6 to fill that gap. That will affect different utilities in different ways: the utilities who counting more heavily on Russian enrichment would find themselves needing to act more quickly and more decisively. And of course, for someone who might not have been concentrating as much, this is a speculative scenario that we are answering. This is a scenario where there isn’t an agreement reached. There isn’t an act of Congress that comes to a resolution where there is a limitation, and the existing currently suspended dumping investigation resumes with the imposition of some very serious tariffs onto the Russian industry, and they decide, look, that’s just not worth it. We’re going to withdraw

Matthew Gordon: That’s a very interesting scenario that you’ve described, because it would suggest it, one could argue that the US can’t do without some Russian supply. And if that is the case, , what is the number? Is that 20% number reasonable? Because, obviously, if the price goes up for utilities, it’s not significant in the scheme of the total investment in terms of a reactor, but it’s significant in terms of ongoing costs, given that the capital expenditure is a sunk cost now. And when they’re competing against gas and renewables, it’s meaningful to them. But the problem has been that some utilities are not sticking to that 20% number. Isn’t that just a case of, so why are we focusing on the Russians and not on the utility buyers who are not regulated or not sticking to that 20% number?

Brandon Munro: Well, it’s a global number. So, presumably, those utilities were looking to get out ahead of each other and speculatively scoop the cheap material away from each other. And I guess they’re just taking their chances on the extension of the Russian Suspension Agreement and their material being available to them.

Matthew Gordon: Can I just clarify the terminology: when you say global, you mean a global US utility number?

Brandon Munro:  I beg your pardon. Yes. It’s an aggregate number amongst –

Matthew Gordon: So, first come first served is the attitude?

Brandon Munro: Yes. But your point, what I take from that point that you make is, it’s not going to be a total disaster for the US utilities, but it will increase their costs and it will increase their cost quite significantly. They pay about 20% of their operating costs as the total nuclear fuel. Now, that’s your U308 through to your conversion, through to your enrichment, your fabrication and storage and so on. But enrichment at the moment is a relatively minor component of that. But if you saw a market suddenly rebalance because all of the Western enrichment capacity is removed by US utilities filling the gap and putting their finger in the dyke, well, then you’ll see proper price discovery and probably market prices in SWU, which will increase that little component that’s enrichment and possibly have a 3% or 4% increase in the cost of electricity delivery for many of those utilities.

Matthew Gordon: Brandon, we are going to switch over to the Crux Investor Club section for Crux Investor Club members. We have got 2 quite good stories, this week; quite insightful, and impactful in terms of investment decision-making. I’m going to do that. Thank you very much, everyone for watching the show this week.

Brandon Munro: It was quite fun answering all of those random questions. Normally with our weekly chat, we have got like a nice thread and I’ve had a bit of chance to think about it and so on. And so, yes, that’s fun.

Company Page: https://www.bannermanresources.com.au/

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Largo Resources (TSX: LGO) – Vanadium Innovators Sitting on a Throne of Cash

Largo Resources Ltd.
  • TSX: LGO
  • Shares Outstanding: 563M
  • Share price C$1.08 (29.07.2020)
  • Market Cap: C$608M

Interview with Paulo Misk, President & CEO of Largo Resources (TSX: LGO)

Largo Resources is a vanadium miner, but since Misk became CEO in 2019, the company has decided to abandon its roots and is morphing into a clean tech solution provider. Why? Because it has the potential to rerate the company. Misk explains how.

The company is ramping up V2O5 production, alongside Tio2 Titanium Oxide (ilmenite – pigments sector) and Vanadium Trioxide (aerospace and Chemical industrial), which would eventually double to company’s revenue whilst maintaining a high margin. We question Misk as to how he hopes to use the catalyst of removing Glencore as their trading partners to break in to new markets and capture more of the margin. Can they do it?

With c. US$200M of cash, Largo Resources will need to continue to innovate if it hopes to drive the share price up. It’s been tracking gently upwards recently after months on the downward slope from its vanadium sport price highs of 2018 & Q1/19. Let’s see what the rest of 2020 has to offer for Largo Resources and vanadium investors.

We Discuss:

  1. 2:27 – An Update of the COVID-19 Situation in Brazil
  2. 4:41 – Company Overview and Background
  3. 8:02 – Evolution vs Revolution: The Re-Development of the Business Model
  4. 15:57 – Confusion in the Market: Update on the Contract with Glencore
  5. 17:45 – Setting Largo up for VRFB
  6. 20:14 – Focus on Core Revenue: Cash Position, Debts, and Money Streams
  7. 25:55 – Plan for the Future: Growing The Company and its Value
  8. 28:50 – Masters of Their Own Destiny: Discussing Glencore Contract Terms
  9. 30:34 – Talk of Stockpiling: Views on Vanadium Price
  10. 32:40 – Allocating Their $200M and Fueling Growth
  11. 36:04 – Management Shareholding and Buying in Market

CLICK HERE to watch the full interview.

Matthew Gordon: Paulo. How are you doing, sir?

Paulo Misk: I’m very fine. Thank you.

Matthew Gordon: And how are things in Brazil?

Paulo Misk:  Brazil is going well, in spite of the COVID situation we are doing very well. We have a very good relationship with the community in the State we are Bahia. It’s a hard situation. It’s tough times, but we have been doing all the preventive measures. No, we are following all the safety and health protocols according to all the authorities and everyone. We are doing our best in that regards.

Matthew Gordon: Good, good.

Paulo Misk: As a result of it, we have kept running. We have full production since the beginning of the year; no impact at all in our performance.

Matthew Gordon: We speak to people from all around the world every day, and different countries are reacting in different ways. We see some quite high numbers with regards to COVID coming out of Brazil. What is the government’s advice to you or to its population?

Paulo Misk: In Brazil, the government is supporting mining. They find that’s the essentiality of the mining in Brazil as the raw material source for the whole industry, it is all in the basics, that’s mining. We have support from the government. We have support from the community, and of course, we need to do our work, our job. We are providing all healthy issues for the employees. And of course, what I say is, we are going to pass this crisis together, each one doing their best. That’s we are doing

Matthew Gordon: I hope the rest of the population is good. I’m hearing you loud and clear; business as usual. So look, there’s a new, well, I said, we interviewed your predecessor, Mark Smith, back in early September, shortly before he left and you took over, so we have heard a version of the story. We are going to hear a new version today. Could you give me a one-minute overview of the business for people who have not heard this story before, and then I’ll pick it up from there?

Paulo Misk: Yes, just a little background about Largo. Largo is an industry-preferred producer and supplier of Vanadium. We produce the best Vanadium in the world, of quality. We have the VPURE and VPURE+, and interestingly about these; the world market is 91% Ferro-Vanadium and the remainder 10% is aerospace industry and chemical applications and VRF B, and the benefit of having a very good product is that we can sell 2/3rds of our production in this special application market. So that gives us a great advantage because there is a premium, a very good premium for that special application. We have produced from our mine in Brazil, we have the world’s greatest, highest-grade of V205. We have the best recovery, overall recovery from the mine to the product, which testifies to our good performance and efficiency at our plant, our production.

At the same time, we have a very low cost. We are one of two or three low cost in the world. I’m comparing to everybody, including Chinese. It gives us a situation, a very good situation to have a very good performance, quality, low cost, and we look at the production, just to have an idea, a of flavour of that: we have been increasing our production year by year. When you look at the Q1/20 results this year, it was 35% over last year, 2019. In Q2/20, we have for production, a 2% increase over 2019 as well. It’s a very good performance. But I will tell you what: our team is responsible for most of those good results. We have a fantastic team. And I have a very good sense of that because I have been there since the beginning, since we started producing in 2014, and I have built, I have helped. We have built this team and we have fantastic people. We are improving every year. Every day, we are looking for our performance, our KPIs, and improving. It’s good. That’s the way we perform.

Matthew Gordon: Let me jump in there because it’s been all change – you have been there since 2014, and in a different role from one you are in now, you took over as CEO at the end of September last year. The business looks like it has changed. You are presenting a different company from the one I spoke to back in early September. So why the change and what was wrong with the previous model?

Paulo Misk: We didn’t change the strategy. It’s just evolution of what we have been doing before.  Mark Smith has a helped a lot, our normal progress we have, and it’s just continuous of all the strategy we have set before.

 But we have a very good news, in fact, last year we increased our production by 24%, our capacity. By the way, it’s a very small CAPEX. And just to have an idea of how successful was these expansion, we jumped from 800t to 1,000t per month of in V205. In the last 2-months, we produced more than 1,000t, 1,050 to 1,030t. We increased our production. And this year we are going to improve our, increase nameplate capacity by 10%. It is a very small cost. The CAPEX will be USD$1.3M, or a 10% increase.

Matthew Gordon: I get it. You go from 800 to 1,100, a 36%, 37% increase overall in that timeframe. These are good numbers indeed, but I want to stick with, I know you said it’s an evolution in the business, but I want to ask, are you, or do you consider yourself a Vanadium business? You have a Vanadium mine, but you are developing products. You are developing VPURE and VPURE+, and you have got other products in the line. So how are you positioning it? How in the board positioning the company?

Paulo Misk: We are today a ‘clean tech’, we provide clean tech solutions. The mine is how we source our product to provide a clean tech solution for the market. And we are working with Vanadium today. It doesn’t mean that’s going to keep producing only Vanadium. And not just this: we are approaching the market, providing more products. We are implementing next year, the Ferro-Vanadium. Also, we are implementing the V203. V203 is 50%, one third of the whole consumption of the aerospace industry and also chemical industry as well. We are approaching the market with more solutions, better products. And it’s not just these: we are developing a process to produce Titanium pigment – Tio2. That’s going to be a fantastic improvement to our business. And we are developing a technology that is going to produce these in an environmentally friendly, it is not going to discharge any fluid, any drop of a fluid into environment. We are doing disruptive improvements in Vanadium. And we’ll be in the future for Titanium as well.

Matthew Gordon: This is what interests me, okay. Because, mining is very difficult. Mining is very tough. Vanadium is quite tough, because of the erratic nature of the pricing in the marketplace, obviously in the second half of 2018, the beginning of 2019, you guys made a lot of money as the price went, shooting up, as it does every 10-years or so. Supply-demand economics on that. But what I want you to explain today is, you said it’s actually an evolution, but to me it seems like a revolution because mining is one thing, going downstream and capturing value, capturing the ability to make more money is important for you because of the way that the Vanadium market has traditionally been, i.e. erratic. Is it an evolution, as you say, or was there the need to say to the board, look, we need to be a clean tech solutions company. We need to position ourselves as something where investors can get away from this Vanadium issue and see us coming up with solutions into this, , whether it be, whichever verticals that you want to sell into, whether it be aerospace, chemicals, or even the EV component or battery storage, etc. What was that conversation like when you became CEO?

Paulo Misk: Yes, first of all, I need to say that I have the full support of the board, and I’m very grateful for that. They have been supporting us, all the projects. they contribute and they support it 100%. That is very important. And the alignment with the board and the management, it ensures that we are in the right path. But when we focus on from the metals, reduction in costs, quality, providing the best product to our customers, provide the green tech solution. When I approached the company that way, we see that we can do more. We have Titanium in our tailings, a huge amount of Titanium, by the way. We are developing that and getting the advantage of have this unique situation. When you look at our revenues and results, when you put Titanium on top of Vanadium, we have another very important revenue stream as important as Vanadium. It gave us a much better situation for facing the market volatility. Titanium is more stable. And, we started those things when we decided to have our own sales team in April, our contract was blanked over, and we did decide to face the market by ourselves. Not just with Vanadium, but it created a situation that we can face another product as well as Vanadium, and these is by this core by-product will be Titanium.

Matthew Gordon: Let’s look at this, because it’s really important because when we were doing this research, people were confused because there are a lot of new things and there are a lot of variables. First of all, you are no longer a Vanadium miner, you are clean tech solutions company – number one.  You have a Vanadium mine clearly, but that’s one product. Secondly, you are looking at Titanium-oxide, ilmenite, for pigments and that thing, as a second revenue, a non-correlated revenue stream. Is that right?

Paulo Misk: Yes.

Matthew Gordon: You have talked about Vanadium trioxide, which is to be able to sell into the high purity end of things, which is the aeronautical chemicals, et cetera line as well. These are small markets, but they’re high margin markets, so I can see why you got that. But the thing which people haven’t understood, properly is obviously with Glencore, the contract finishing earlier this year, you built your own sales and trading team. What does that mean? What are you now capable of doing, and what’s that done for your bottom line?

Paulo Misk: We joined a very good sales team, experienced people, competent, and I’m very happy with them, very confident with all the capabilities and they have been performing in a very, very good way. We joined them in the middle of last year. It was part of our strategy as well. And it means that we’re going to get all the opportunities, and value that sales opportunities provide. And for us, it’s essential to have our own path and to know about how we going to face to market and provide the best solutions. There is no other way. We are not just a producer. We are not just a project with, which was six years ago, but now we are a company that’s providing clean tech solutions and not just for aerospace or chemical applications, we are looking very closely at all the VRF B opportunities. I don’t know if everyone knows about that.

Matthew Gordon: Vanadium reflux batteries, we have talked about that a bit on our shows, we have done a few interviews on the topic. It is a nascent industry. It is very early days, but you need to set yourself up for that. So again, without wanting to bounce around too much, what are you doing with regards to setting yourself up for Vanadium redox flow batteries?

Paulo Misk: Yes. I said that Largo is a unique company that can supply Vanadium for these applications because we have the quality enough, not everyone has the quality. If you look at the whole production of Vanadium, it’s 70% is slag, which doesn’t provide enough quality. Our product, which we can apply to VRF B. And at the same time, we are expanding our production. We don’t need to put this extra production into the Ferro-Vanadium market, which may not have a good impact on the price, but we can drive this extra volume of Vanadium to an application of Vanadium redox flow battery, which is a storage energy. It is a completely new, disruptive improvement in the market. When you see all the green generation of energy, electricity, solar, wind farms, they need some device to store energy. Nobody uses energy late at night, or the bigger consumer consumption is not at noon. You need to keep the energy producing during those periods and discharge it when people use most. And the VRF B provides that solution,

Matthew Gordon: Vanadium electronic for VRF B, it’s coming, but it’s early days. So, years of business. You need to plan for it, but you can’t plan for the revenues that it may generate yet because it’s some way down the line because people need to be taken up in the marketplace. People need to come up with designs which they’re able to sell into market for you to be able to sell into that market. So right now, you are focused on your core revenue streams. Which is selling what? Where is the bulk of the money that you are going to be focused on coming from now and for the next couple of years?

Paulo Misk: Yes. Right now, we are not producing Ferro-Vanadium, because we convert some partners. Vanadium pentoxide, especially the high purity, the V Pure plus. Increasing the V203 as well, because they have the capacity to increase our sales in aerospace and chemical by 50%, only having this material. And it’s interesting because our customers are asking us that we need to have V203, because they’d like to have our Vanadium, high, pure quality in the whole Vanadium needs. So that’s the way we are going to approach and make the results.

Matthew Gordon: So that’s the core focus for the next couple of years. You have got to focus on money, you have got to be making money. Okay. So, and with your sales team on board, your margins, well, presumably your margins have increased because you are not giving it away to a Glencore anymore. Can we talk through your finances? Because, you make a big thing of the amount of cash that you’ve got available. How much of that is free cash and where does it come from in terms of operations versus financing?

Paulo Misk: We have a very good cash position. Very good. It is a unique situation. By the end of the last quarter, our cash position was in a range of USD$147M. It is a very comfortable situation. We have enough cash to pay all the debt that was with Glencore. There are some payments we have done but we have a very comfortable situation to face in the new projects, to face in all the period with COVID. Of course, there is some impact in Europe and the US mainly. China today is launching and producing, it is US crazy, and we are getting independent of that. We are selling material to China today. If you look at the price in China of V205, it is in the range of USD$7 per pound. It is a very strong market and we are getting the advantage of that market, which is really hot, really excited, but also Europe and the US, we will rescue all of the industry and as production, I expect, by Q4/20 this year. That is the way we are making good for the investors.

Matthew Gordon: I’m just looking at your presentation; you talked about Q1/20 numbers, the operations contributing, it’s USD$11.6M, but you have got USD$35.8M provided by financing activities. Can you just help us understand the difference between those two?

Paulo Misk: Yes, that is because we are positive in cash and we are getting advantage out of the situation, but of course, the best investment for our cash is our operation. We have great results and we provide much better results by investing in Largo and all these projects and expanding all of our operations and solutions for the customer.

Matthew Gordon: But what things does it cover? Because that is a good return, given them amount of cash that you’ve got – USD$5M is quite nice. What sorts of things were you doing there, given you paid off a big chunk of debt to Glencore, you are now debt free. Is that true?

Paulo Misk: Eventually, we got some cash in the market, some loans. Just to, we didn’t know how COVID-19 would impact our business. It is an unpredictable situation. We got a small portion just to be safe. And we could see that we didn’t have any problem with operations, sale, so it was just to be safe.

Matthew Gordon: Okay. But you had no problems raising that loan or that debt in the marketplace because you are producing cash and people want to give you money? Is that what you are telling me?

Paulo Misk: Yes. That’s a fact. We have a very good situation. We have cash and that’s the perfect situation to get some money from the market; when you don’t need it, you get a very nice interest rates and that’s the way we did it.

Matthew Gordon: Banks love to give you money when you don’t need it. That’s the time to ask for it. Again, I have built up a picture of where the company was in September and what you have done in terms of migrating it through to a solutions provider. I get it. And I can understand why that might have a higher multiple as far as investors are concerned, certainly institutional investors, once you get those revenue streams going. Can you talk to us about how quickly you think those new revenue streams are going to be able to kick in with meaningful revenue? What does the next five years look like for you? And if you can give us some sense of where, as a percentage, where the revenue is coming from, how much is trading going to contribute as a percentage? How much each of the new product lines going to contribute?

Paulo Misk: Yes. Well, we didn’t disclose those figures so I cannot give you the details about it, but I can give you an overview. We are going to keep growing the revenue and the margin with Vanadium by providing better products like the V203. When you get this Titanium pigment, it’s not even supplies, it is pigment. We expect that, it is our objective and aim to double our revenue stream, any to be basically 50:50 Vanadium/Titanium pigment; that’s our aim. And when you look at all the production from Titanium, we just need to add the processing, ore processing. I’m not including crushing, not milling, because it has already been done, this phase, but just the produced the ilmenite from flotation, adding a chemical plant, in a sequence. And you are going to get the lower cost Tio2 pigment in the world. Because we have already spent all the mining and milling, which is an expensive step. It will be in a very good margin as well.

Matthew Gordon: It is Titanium-oxide, ilmenite pigment used in food and in all sorts of applications, paints, etc. That will double your revenue, but as a percentage of your margin, you think it’s going to be quite a high margin product?

Paulo Misk:  Yes. That is going to keep high, as much as we are doing Vanadium. But that’s our expectation. We need to fulfil all the studies steps and there’s a lot of work to do. We expect to have this package done, all of the studies done by Q1/21 next year. In Q1/21, I will be able to provide all the numbers and exactly forecast for what we are going to do in all of our plants.

Matthew Gordon: Understood. It is not such a long runway if you are talking about Q1/21 next year, so that’s not too far away. We will listen out for those numbers as and when you start to understand them better.

Sorry to keep coming back to the trading, but, such a big deal was made of the fact that Glencore would be removed and you would be  masters of your own destiny at that point, but can you give us an idea of what you think that should do to your bottom line? I mean, if you are now in charge of your own sales process, I mean, how much was Glencore taking off the top?

Paulo Misk: Yes. again, I cannot give you details about the agreement with Glencore, but we don’t get the full premium when you sell the high purity. Now we have, the full one. So, it is an advantage to be alone, but not just that; we are increasing our share in the high purity, I’m talking about aerospace, although this sector is facing a very hard time, but also for chemical. We didn’t sell one pound for chemical applications before, but we have done this already. We are selling material to the chemical applications. That is our focus, because the premium is even higher than aerospace. So just not having Glencore doing our sales, we get more premium and we increase the VPURE+ sales. It is big advantage. Glencore was a very nice partner of Largo, but they are also a Vanadium producer s there is a conflict of interest.

Matthew Gordon: Tell me a little bit about stockpiles, creating stockpiles. What is the idea? Sell everything that you produce out of the mine as quickly as possible, or do you stockpile and say, there’s price recovery in the market to come in. And what’s your view on the Vanadium pricing in the market, for instance?

Paulo Misk: In Q2/20, we built some inventories because you need to put some material in the warehouses around the world. We are converting to V203, but the build-up we have done this step already. Q2 is a very important one. And that is the thing to have a very good cash position because it doesn’t, hit the company. We built the inventories, we are ready to supply all customers around the world with Vanadium Pentoxide, high purity, and Ferro-Vanadium, as when they need it, because we have already built those inventories in Q2. We are ready to –

Matthew Gordon: What is the value of those stockpiles that are sitting around the world? What are they down on the balance sheet as?

Paulo Misk: It is about, let’s say 2000 tons overall of V205. If you look at our production guidance, it’s 12,000 tons of V205 this year, but our sales guidance, is about 2000 tons less. That’s why we planned that situation and we are performing as planned.

Matthew Gordon: Say you produce that 2,000t at around, let’s say a cost of USD$3.25. So that gives us a sense of how much money, net, is available to you sitting around the world in stockpiles. I just want to understand what else do you do with your USD$200M? You have got a lot of different new projects at various stages, requiring markets to develop, requiring you to deliver things like, especially like run the Titanium oxide project. So how much net cash have you got and how do you plan to spend that? How do you keep driving this growth? Have you got enough projects on the go?

Paulo Misk: It is one step at a time. I would not say exactly what cash position we have today, just because it has not been disclosed yet, but we have enough cash now to run the V203 plant. We will implement that. That is our priority, by the way. We postponed the FEV plants, by the end of last year. We have time to do both in a very good way, no problem at all. And the Titanium implementation will take a little bit longer because we’re going to have, next year, all the things done. And we have started already talking to the market to see how we can fund this for the Titanium project. So, let’s build all the projects one at a time and adjusting our cash situation and finance and getting partners. All the strategies are not definite as yet, but I have no doubt when you have good things to sell, it is much easier to get partners and people to help you. And all of our shareholders support all those actions. I have been talking to them and they are very happy with what we are doing with the company and how we are going to make it happen.

Matthew Gordon: There are some very, very big plans in there. And I appreciate that the change of positioning of the company could be dramatic in terms of the institutions’ view of you. I get that. That’s good. But you are going to be building up a big debt position to be able to get these things going. I presume it’s going to be mostly debt, is it?

Paulo Misk: Yes. We didn’t define the strategy for these yet, but probably it is going to be that.

Matthew Gordon: You have got the revenues to be able to pay the coupons. So why not?

Paulo Misk: And by the way, that’s the perfect situation because the interest rates are very low. You asked, for example, the expectation for this interest rate for next three years to be the same level. It is unbelievable, and we have never seen this situation in history before. It’s a good time. We have a good project to raise money and help the economy to re-establish at the previous level. And we will be part of that and take advantage of all situations.

Matthew Gordon: Stay in touch with us and let us know how that’s getting on. Because that’s quite important because with growth comes growing pains, and the cost of finances is important, as you say. The board, have you been buying shares in the market? I know you were pre-COVID, but what have you been doing since then?

Paulo Misk: I have been buying shares because the price is ridiculous, by the way, it’s very low price. And I expect, I’m not an analyst, but it values much more, in the current basis. I’m not talking about the projects. I’m not talking about the improvements that we are going to implement, but in the current basis, performance, this price is very under-valued. It’s a good moment for buying and I’m doing this.

Matthew Gordon: Your shareholders would agree with you. They don’t understand what has been happening with the share price, because obviously, since the highs of, towards the end of 2019, it has been in steady decline as the price has fallen away, obviously. But they are looking for you to lead from the front and tell them why the future looks good. What I’m hearing today is there are future revenue streams that you are planning for. And the possible re-rate, if the market buys your story that you are no longer a Vanadium company, for sure. Well, Paulo, that’s a nice run through for the first of the new story. It’s the first time we have spoken or met, so I appreciate you spending your time explaining that. People are unsure about Vanadium, but maybe what you are doing, the plans that you have in terms of capturing more of the value downstream might be more appealing to a lot of your current investors and a lot of new investors as well. Thank you very much for your time.

Paulo Misk: Thank you very much. And thank you to the audience. It has been a pleasure talking to you and keep safe, please.

Company Website: https://largoresources.com/

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